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COPYRIGHT DEPOSE. 



Appletons' 
Business Series 



FUNDS AND THEIR USES 



FUNDS AND THEIR USES 

INTRODUCTION TO FINANCE — DESCRIBING 
THE METHODS, INSTRUMENTS, AND INSTITU- 
TIONS OF MODERN FINANCIAL TRANSACTIONS 

BY 
FREDERICK A. CLEVELAND, Ph.D., LL.D. 

FORMERLY PROFESSOR OF FINANCE, NEW YORK UNIVERSITY SCHOOL OF 

COMMERCE ACCOUNTS AND FINANCE; PROFESSOR OF U. S. CITIZENSHIP 

ON THE MAXWELL FOUNDATION, BOSTON UNIVERSITY 



REVISED EDITION, ENLARGED AND EDITED BY 
HENRY B. HALL, Ph.D., 

FORMERLY ASSOCIATE PROFESSOR OF MONEY AND BANKING, WESLEYAN 
UNIVERSITY; ECONOMIST FOR THE STATE OF RHODE ISLAND 




D. APPLETON AND COMPANY 
NEW YORK : : 1922 : : LONDON 



rt<*** 






copyright, 1902, 1903, 1922 
BY D. APPLETON AND COMPANY 



PRINTED IN THE UNITED STATES OF AMERICA 



DEC -5 



EDITOR'S FOREWORD 

The wide recognition as a standard text accorded Pro- 
fessor Cleveland's Funds and Their Uses during the 
last two decades makes the work of revising it a privilege 
as well as a duty. Some features of the book deserve special 
notice. The practical point of view maintained throughout 
is one of these features; the subjects are presented as 
matters of actual occurrence, so that the reader is not 
detained in mere theorizing, but rather he is led simply 
and directly to an intimate and accurate knowledge of the 
financial instruments and institutions of modern business. 
At the outset, the title is explained; the term "funds" as 
used in the text has much the same meaning as ' ' cash, ' ' but 
includes more — ' ' any and all things which may be accumu- 
lated and which may be currently used in a community in 
exchange for goods or properties." Money and credit are 
treated as two different classes of "funds." Money is a 
form of funds which, when exchanged, completes the 
transaction ; while credit is a form of funds which, when 
received in exchange or payment, is valued as a promise to 
deliver money in the future. 

Part I deals with our money system ; following which it 
is pointed out that in most purchases and sales credit 
instead of money is used. But how and why this occurs is 
explained in Parts II and III, which deal respectively with 
credit instruments and credit institutions. 

In actual business practice funds are usually obtained by 
first having possessed one's self of something to sell — goods 
or services; although they may be obtained by gift or 
by inheritance. Since the business man and banker usually 
obtain their funds by disposing of goods, they are chiefly 



vi EDITOR'S FOREWORD 

concerned with questions of relative value of things offered. 
In this relation distinction is made between forms of credit 
used to obtain funds and forms of credit used as cash. 
Again, in describing the several forms of credit used for 
obtaining funds, distinction is made between commercial 
paper as a form employed to obtain funds for current use, 
and corporate securities as instruments employed to obtain 
funds for more permanent use. The line drawn between 
these two classes of instruments is that commonly recog- 
nized in everyday business experience. 

The student 's interest is aroused by the business problems 
presented and then he is led to acquire knowledge of the 
specific instruments used. The same policy is pursued 
throughout the book. Part III opens with the money and 
credit functions of the United States Treasury. Chapters 
dealing with commercial banking emphasize the problems 
which concern the bank manager rather than questions of 
academic interest. In these are included the national bank, 
the state bank and the private bank as related parts of a 
common credit service. The federal reserve system is out- 
lined from this same practical point of view. What was it 
devised for? What does it do? How does it supplement 
the work done by other institutions? Minor details of or- 
ganization, though mentioned, are relegated to their proper 
place in the discussion. The chapters on insurance com- 
panies, building loan, cooperative loan and investment insti- 
tutions, investment bankers, brokers and broker's boards 
add still further to the completeness and practicability of 
the book. 

The book is well supplied with illustrative material. 
There are over a hundred and thirty-five illustrations 
showing differing kinds of ' money ; forms of credit for 
cash ; notes, drafts, invoices and bills of exchange ; stock 
certificates and bonds; as well as interior and exterior 
pictures of important banking and other characteristic 



EDITOR'S FOREWORD vii 

institutions. These illustrations are even more instructive 
than any description in the text could possibly be. For 
example, the foreign bill of exchange ; the grain warehouse 
receipt or the order bill of lading can be much more thor- 
oughly comprehended by the student unfamiliar with busi- 
ness documents if they are shown to him in sample, than 
if they are merely described. The student who can actu- 
ally have under his eye fac-similes of these instruments of 
credit, see what they look like and what they have written 
upon them, will find therein instruction which no amount 
of exposition could ever give to him. 

The classification of subject material is effective. It fol- 
lows the natural human inquisitive bent by asking the ques- 
tions in succession — What? How"? Who? What are 
funds, that is to say, what are the things with which the 
great business world makes its yearly payments of billions 
of dollars ? How are these things obtained ? What is their 
source and in what manner are they related to the opera- 
tions of production, transportation, storage and exchange? 
Who handles these things, individuals, private corporations, 
government agents? What is the relation between these 
institutions, and what are the methods and systems under 
which they operate? 

This is the general trend of the subject matter of the 
book. It follows the lines of approach and investigation 
which have repeatedly proved successful in presenting 
courses in money and banking to classes in business colleges, 
as well as in colleges of liberal arts. 

The present edition has been thoroughly revised and 
rewritten where necessary to bring it up-to-date. It has 
also been considerably enlarged. The chapters on the 
United States Treasury, commercial banks, Federal Re- 
serve System, trust companies, investment banker, and 
agricultural credit institutions are virtually new. They 
have been written primarily to meet the needs of college 



viii EDITOR'S FOREWORD 

classes in approaching for the first time the problems of 
money, banking, and special courses in public and private 
finance. Each chapter is followed by a short bibliography 
to be used for collateral readings. 

Henry B. Hall 

North Pemberton, Mass. 



AUTHOR'S PREFACE TO 
REVISED EDITION 

Except in its public aspects, the subject of finance had 
received little attention in the schools and at the hands of 
writers of books before 1901 when the first edition of this 
modest volume was prepared. The necessity for funds 
with which to carry on King William's war with France 
gave rise to the Bank of England, and with it to modern 
funding methods. Nearly all the great banks founded 
before the latter half of the nineteenth century and all 
the great banking systems had grown out of public rather 
than private needs. So constantly had attention been 
drawn to funding measures of government that the words 
"finance" and "funds" had come to be associated almost 
exclusively with public affairs. 

About the time of the Civil War the world entered upon 
a new era— an era marked by rapidly increasing cumula- 
tions of investment funds in the hands of privately man- 
aged institutions of saving and insurance. And, coincident 
with this centralization of investment capital, private cor- 
porate organizations rapidly expanded. Then followed 
the period of "consolidations," "holding-companies," 
"trusts," the "billion dollar industries." New problems 
were presented, which required of the student of finance 
that he have an understanding of the methods, instruments 
and institutions of private as well as of public funding. 
And a new literature of finance came into being. It was 
to bring together and present in simplest form the ele- 
mentary facts related to both branches of the science that 
this book was written. 

ix 



x AUTHOR'S PREFACE TO REVISED EDITION 

In twenty years the institutions of finance have under- 
gone great change. It was necessary therefore to have the 
book revised and enlarged, especially Part III. This has 
been chiefly the work of the editor, Professor Henry B. 
Hall. To the collaborators — to Professor Robert H. Loomis 
of Boston University College of Business Administration 
— for advice and cooperation in planning the revision and 
assistance in preparing the bibliography and writing the 
paragraphs on the Morris Plan banks, to Mr. Eugene Jay 
Koop of Spencer Trask & Co. for valuable assistance in 
preparing the chapter on "The Investment Banker" and 
for reviewing the chapter on ' ' The Broker and the Broker 's 
Board" and especially to Mr. Erastus W. Bulkley, who has 
shown interest in having the volume brought up to date and 
who has been generous in suggestions for revision as well 
as contributing materially to the chapter on ' ' The In- 
vestment Banker" and to Miss Edith A. Goodspeed for 
assistance in reading the manuscript and preparing the 
table of contents — the author desires to express grateful 
appreciation on behalf of himself and the editor. 

Frederick A. Cleveland 
Norwood, Mass. 



CONTENTS 



CHAPTER PAGE 

I. Public and Private Funds 3-11 

Property, 3. How property is acquired, 3, 4. Ex- 
change the chief method of acquiring property, 4, 5. 
Importance of funds in business, 5. What is business, 
5, 6. Necessity for law and order in business, 6, 7. 
Business law, 7, 8. Elements of success in business, 
8-10. Funds a necessary part of business equipment, 
10. Funds, the subject of finance, 10, 11. 

II. Money Funds 12-32 

Definitions — funds, 12-14. Two forms of funds, 14. 
Essential characteristics of money, 14, 15. A money 
fund must admit of divisions into units, 15, 16. Money 
funds must be uniform in quality, 16. Money funds 
must have durability, 16, 17. Money funds must admit 
of being carried about, 17. Skins, 17, 18. Dried fish, 
18. Live stock, 18. Agricultural products, 18, 19. Ad- 
vantages and disadvantages in the use of these forms 
of monev, 19. The base metals, 19-21. Ornaments, 
21, 22. Gold and silver, 22, 23. The development of 
a standard, 23-25. The decimal system, 25, 26. The 
"dollar" the central fact in our system, 26, 27. Gold 
coins of the United States, 27. Silver coins of the 
United States, 27, 28. Minor coins, 28. Paper money 
in circulation, 28-31. United States notes or green- 
backs, 28. Gold certificates, 28, 29. Silver certificates, 
29. Currency certificates, 29. Treasury notes of 1890, 
29, 30. Fractional currency notes, 20. Old demand 
notes, compound interest notes, 30. National bank 
notes, 30. Federal Reserve bank-notes, 30. Federal 
Reserve notes, 30. The uniformity of value in our sys- 
tem, 31. 

III. Credit Funds 33-58 

Definition of credit, 33. Credit as current funds, 34, 
35. A credit purchase, 35, 36. Credit arises out of 

xi 



xii CONTENTS 

CHAPTER 

exchange, 36, 37. The principles of exchange as ap- 
plied to credit, 37. Value and price of credit, 37, 38. 
Basis of credit judgment, 38. Ability to obtain money 
for future delivery, 38, 39. Business integrity, 39. 
The result of favorable judgment — confidence, 39. Se- 
curity, 39, 40. Relation of security to credit, 40. A 
short sale of flour, 140, 141. Settlement of the short 
sale of wheat, 41, 42. A short sale of money, 42, 43. 
Rules of settlement the same as in case of short sale of 
wheat, 43, 44. A corner on money — financial distress, 
44. Bank-notes, 46-48. Bank accounts — deposits, 48. 
Emergency currency, 48-51. Emergency funds, 51-55. 
Public emergency currency, 55-58. Current credits, 58. 
Mutual credit, 58. 

IV. Instruments of Transfer of Credit Funds 59-82 
The customer's check, 59. Form and significance of a 
"customer's check," 59, 60. How to make out a "cus- 
tomer's check," 60. Date of check, 60, 61. Filling in 
the amount, 61, 62. Entering the name of the payee, 
62, 63. Checks should be numbered, 63. The "check- 
book," 63. Drawing check to oneself, 63, 64. Checks 
drawn to oneself for special purposes, 64. Checks 
drawn to others for special purposes, 64, 65. Safety 
devices in checks, 65, 66. Receipts used as checks, 66, 
67. How to authorize others to draw on one's account, 
67. The crossed check, 67-69. The cheque-bank check, 

69, 70. Other instruments of transfer of credit funds, 

70. The "certified" check and the "cashier's check," 70- 
72. The letter of credit, 72-76. The "traveler's 
check," 76-78. The interchangeable bank money-order, 
78-79. Place of credit in modern finance, 79-82. 

V. Funds Obtained by Gift and "Expropriation" 85-94 
Primitive economy. The family, 85-86. The class and 
the tribe, 86. Other non-industrial groups, 86-87. 
"Gift" the funding method of dependents, 87-88. "Gift" 
and contribution usually take the form of funds, 88. 
Funds obtained by "inheritance," 88-91. Laws of inher- 
itance, 91-93. Funds obtained by "expropriation," 
93-94. 

VI. Funds Obtained by Exchange .... 95-115 
Limit to funding power, 95-96. Capitalists, 96. What 
may be offered for capital, 96. Saving, 97. Importance 



CONTENTS xiii 



CHAPTER 



of training, 97, 98. Sale of goods produced by labor, 
98, 99. Sales of property not adapted to capital em- 
ployment, 99. The sale of one business interest to cap- 
italize another, 99, 100. The sale of business interests, 
100, 101. Sale of partnership interest, 101. The sale 
of corporate shares, 101, 102. Capital stock, 102-104. 
Stock certificates, 104. Difference between corporation 
and partnership, 104-106. Financial advantage of the 
corporation, 106. Common stock, 107, 108. Preferred 
stock, 109-111. Kinds of preferred stock, 112. First 
preferred and second preferred, 112. Cumulative and 
non-cumulative preferred, 112-114. Trust certificate, 
114. Other forms of stocks, 114, 115. 

VII. Funds Obtained by Sales of Commercial Credit, 

116-158 

The extent of credit uses by the laboring man, 116-118. 
The man with property, 118. Promissory note, 118. 
Form of note, 118-125. As to parties, 118-120. Words 
of transferability, 120-121. As to promise, 121-123. As 
to date of making a note, 123, 124. As to signature, 
124. A "marks" signature, 124, 125. Non-essential 
clauses, 125, 126. "Without defalcation," 125. "Credit 
the drawer," 125, 126. Parts of note containing con- 
tracts of security, 126-128. Personal security, 128-130. 
Accommodation signature, 128. Indorsement, 128, 
129. Without recourse, 130. Guarantee note, 130, 131. 
Collateral note, 131, 132. Memorandum collateral note, 
132-133. Judgment note, 133. Judgment note with 
power of attorney, 133-135. Presentation for payment, 
135. Part payment, 135, 136. Legal-tender, 136. Non- 
payment of note, 136-137. Notice of non-payment, 137. 
Waiver of demand and notice, 137, 138. Protest, 138- 
141. Notice of protest, 141. Advantages and disad- 
vantages of using promissory notes, 141-143. Accounts 
stated, 143, 144. Accounts settled, 144, 145. Accounts 
paid, 145, 146. A set off, 146. Due-bills, 146. Com- 
mercial drafts, 146-148. Foreign bills, 150, 151. Sight- 
bills and drafts, 150. Time-draft, 150, 151. Security 
for acceptance and payment of drafts, 151-153. A doc- 
umented bill, 153-157. Secured drafts used as funds, 
157-158. Non-payment and protest, 158. 

VIII. Funds Obtained by Sales of Long-Time 

Paper 159-208 

Form of long-time credit, 159, 160. Illustrations of 



xiv CONTENTS 

CHAPTER 

difference in forms and uses of long and short-time 
paper, 160-163. Classes of long-time credits, 163. 
What is a "mortgage"? 163-165. Mortgage contracts 
one of sale, 165. Mortgage without separate note, 165- 
167. Accommodation mortgage, 167. The indemnity 
bond and mortgage, 167-169. Chattel mortgages, 169. 
Farm mortgages, 170. Mortgages on "business prop- 
erty," 170-172. Mortgages on mines and timber lands, 
172. Parti-mortgage receipt, 172-174. The collateral 
certificate, 174. Bonds, 174-177. The trust company as 
agents of sale and transfer, 177, 178. Unsecured bonds, 
178-181. Bonds distinguished from notes, 182. Security 
of bonds, 182-185. Trustees of bond security, 185. Who 
may be trustee of a bond issue, 185. How corporate 
bonds differ from corporate shares, 185-187. Guar- 
anteed and indorsed bonds, 187. Bonds based on lien 
security, 187-195. Real estate bonds, 187. General 
mortgage bonds, 187-189. Blanket mortgage, 189. Con- 
solidated mortgage, 189. Divisional bonds, 189. Col- 
lateral trust bond, 191. Equipment bond, 191. Car- 
trust bonds, 191, 192. Debenture bonds of financial 
companies, 192, 193. Railroad debenture bonds, 193, 
194. Income bonds, 194, 195. Bonds classified accord- 
ing to their purpose, 195-197. Gold bonds, 197. Legal- 
tender bonds, 197. Coupon bond distinguished from 
registered bond, 197. Redeemable bonds, 197-199. Con- 
vertible bonds, 199. Payment and extension of bonds, 
199. Security of receivers' certificates, 201-203. The 
advantages of receivers' certificates, 203. Certificates of 
indebtedness with no due date as to principle, 203-206. 
The lease as security, 206, 207. The uses of the lease 
bv credit stores, 207. Dangers of lease purchases, 
207, 208. 

IX. The United States Treasury .... 213-230 

Relations of government to modern systems of finance, 
213, 214. Coinage, 214. Providing for a complex sys- 
tem of money, 214, 215. Maintenance of a standard, 
215. By redemption of inferior coins, 215, 216. By 
redemption of paper money, 216. The United States 
Treasury, 216, 217. History of the Independent Treas- 
ury, 217-219. Our monev system a refined system of 
credit, 219, 220. Bank credit money, 221, 222. Actual 
payment of gold not usually demanded, 222, 223. Im- 
portance of gold standard, 223, 224. Maintenance of 



CHAPTER 



CONTENTS xv 

integrity of our money, 224. The Mint a money factory, 
224-226. Relation of the Revenue Department, 226, 227. 
Gold and other money assets of the Treasury, 227-229; 
Taxation, 228. Sale of assets of Government, 228, 229. 
Government borrowing, 229. 

X. The Commercial Bank 231-249 

Necessity for current funds in industry, 231, 232. Ob- 
stacles to business without a bank, 232, 233. Bank fur- 
nishes current fund in the form of "bank credit," 233. 
Exchanges "bank credit" for money, 233, 234. Allows 
its customers to convert "business credit" into "bank 
credit," 234, 235. Serves as agent for the presentation 
and collection of "business credit," 235. Acts as trus- 
tee, 235, 236. Sells exchange, 236, 237. Buys and sells 
foreign moneys, 237. Acts as bullion broker, 238. Binds 
together and enlarges business relations, 238, 239. 
Profit of the bank, 239. Profits arise out of exchange 
of "demand credit" for "time credit," 240. Equipment 
of bank, 240, 241. Money reserve, 241. Ordinary de- 
mands for money, 241, 242. The bank's salable credit, 
242. Profits based on investment of credit, 242-244. 
Kinds of investment that a bank may safely make, 
244-249. 

XI. The Federal Reserve System and Other 

Aids to Commercial Banking .... 250-274 

Early banking regulation, 250. The national banks, 
250, 251. National banking system inadequate, 251, 
252. The dual svstem of banks, 252. Inadequacy of 
reserves, 252, 253*. The panic of 1907, 253, 254. The 
strain on the New York bank reserves, 254. Inelasticity 
of the national bank notes, 254, 255. Absence of redis- 
count sj'stern, 255, 256. The Aldrich-Vreeland Act, 256, 
The Federal Reserve districts, 256. Capital of Federal 
Reserve banks, 256-258. Directors of the Federal Re- 
serve banks, 258, 259. Earnings of the Federal Reserve 
banks, 259. The Federal Reserve Board, 259, 260. 
Powers of the Federal Reserve Board, 260. Rediscount- 
ing agencies, 260, 261. Government fiscal agent, 261, 
262. Note issues, 262. Federal Reserve notes, 262-265. 
Mobilization and protection of reserves, 265, 266. Re- 
discount, 266, 267. Intradistrict clearing through the 
gold-settlement fund, 267, 268. Transfer of funds be- 
tween Federal Reserve Banks, 268, 269. Intradistrict 



xvi CONTENTS 

CHAPTER 

clearing, 269, 270. State banks in the Federal Reserve 
system, 270, 271. Scope of Federal Reserve system, 
271. Government institutions providing credit during 
the emergency of the Great War, 271-273. 

XII. The Trust Company 275-284 

State banks, 275, 276. Trust companies, 276. Com- 
♦ mercial banking activities of trust companies, 276, 277. 
The service of the trust company, 277, 278. The econ- 
omies of the trust company, 278, 279. Development 
of trust company business, 279, 280. Functions of 
modern trust company, 280-284. 

XIII. The Investment Banker 285-300 

Need of capital in modern enterprises, 285. Difficult 
role of the investment banker, 285, 286. Risk involved 
in new undertakings, 286, 287. Link between business 
enterprise and the public, 287, 288. Investigation of 
new issues, 288, 289. Helping the investor, 289-292. 
General characteristics, 292, 293. The buying depart- 
ment, 293, 294. Staples and specialties, 294, 295. Buy- 
ing in large lots, 295. The financial department, 295, 
296. The selling department; investor classes, 296, 297 
Selling methods, 297-299. The investment demand, 299, 
300. Bonds and the small investor, 300. 






XIV. The Savings-Bank ........ 301-324 

Every business based on service rendered, 301-303. In- 
creased profits the result of increased capital, 303. 
Savings as a means of obtaining capital, 303-306. 
Earnings, 304. Expenses, 304, 305. Profits, 305. Sav- 
ings from labor, 306. The services of the savings-bank, 
306-307. Conditions giving rise to the savings-bank, 
307, 308. The first savings-banks, 308, 309. The safe 
investment of savings, 309, 310. The investments of 
savings-banks, 310. Illustration of the service of a 
savings-bank, 311-312. Savings are capital funds, 312, 
313. How to deal with a savings-bank, 313-315. Rules 
governing investments of the savings-banks, 315-317. 
Safety of investment, 317. Rate of income, 317, 318. 
The mutual and the joint-stock savings-bank, 318-321. 
Comparisons of methods, 321. Relations of the Savings- 
bank to the money system, 321. Relations of savings- 
bank to other financial institutions, 321, 322. Postal 
savings system, 322 324. 



CONTENTS xvii 

CHAPTER 

XV. The Building Loan Association and Sim- 
ilar Lending Institutions 325-341 

The distinguishing features of the Building Loan Asso- 
ciation, 326, 327. Conditions out of which the institu- 
tion arose, 327-330. Plans for making loans, 330-332. 
Loans at a fixed rate by lot, 331. Sales at auctions; 
advance of interest, 331. Award to bidder of highest 
premium on dues, 331-332. Plans for distributing of 
profits, 332-336. Withdrawal plans, 336-339. Morris 
Plan banks, 339-341. 



XVI. Agricultural Credit Institutions and 

Farm-Mortgage Banks 342-364 

Distinction between agricultural credit and rural credit, 
342. Agricultural credit operations, 342-344. Ware- 
house receipts are basis of loan, 344-346. Financing 
foreign shipment of grain, 346, 347. Methods of 
financing the movement of the cotton crop, 347-349. 
Cattle loans, 349. Commodity paper, 349, 350. Nature 
of rural credit, 350-351. Farm-mortgage bank, 351, 
352. Negotiating farm-mortgage loans, 352, 353. Vol- 
ume of farm-mortgage loans, 354, 354. The nature of 
a real estate mortgage, 354-357. The farm mortgage 
standardized, 357, 358. The service of farm-mortgage 
institutions, 358, 359. The Federal Land Banks, 359- 
362. Rural credit unions, 362, 363. State Land Bank 
of New York, 363, 364. 

XVII. The Insurance Company 365-385 

The meaning of insurance, 365. Credit insurance, 365- 
367. The Security Insurance Company, 367, 368. Dif- 
ferent forms of risks, 368-370. Individual risk and 
speculation, 370, 371. Safety of insurance, 371-372. 
The principle of life insurance, 372, 373. The "natural 
premium" and the "level premium" plans, 373. Assess- 
ment insurance, 373, 374. The reserve companies, 374- 
377. Application of the two principles of life insur- 
ance, 377-379. The cash items of insurance companies, 
379, 380. Insurance companies as factors in the se- 
curity market, 380-382. Social responsibility of insur- 
ance companies. Results of Hughes investigation, 382, 
383. Expansion of new fields of insurance, 383, 384. 
State insurance, 384, 385. 



xviii CONTENTS 

CHAPTER 

XVIII. The Broker and the Broker's Board . . 386-407 
The note-brokers,, 386-388, Exchange-broker, 389, 390. 
The produce-broker, 390, The Broker's Board, 390, 
391. History of stock exchanges; Philadelphia, 391. 
The London Stock Exchange, 391, 392. The New York 
Stock Exchange, 392, 393. The Consolidated Stock and 
Petroleum Exchange, 393-394. Organization of a stock 
exchange, 394. Organization of the Philadelphia Ex- 
change, 394-397. The floor arrangements and office ap- 
pointments of brokers, 397-399. Organization of the 
broker's office, 399-401. Distinction between invest- 
ment and speculation, 404-407. The speculative con- 
stituency, 401-404. The bucket-shop, 403-406. 

Index 409-^425 



ILLUSTRATIONS 



2. Silver-sheet money 

3. Note of First Bank of United States . 

4. Note of Second Bank of United States 

5. Note of Southern Bank of Kentucky . 

6. Note of Exchange Bank of St Louis . 

7. Note of Tioga County Bank ...... 

8. Clearing House certificate, small denomination 

9. Clearing House certificate, large denomination 

10. Turnpike Company scrip 

11. Sutler Scrip issued during Civil War 

12. Railroad trading scrip 

13. Loan scrip, used to meet payrolls . 

14. Scrip issued by Canal Co. ; note worn condition 52 

15. Shilling scrip, issued by Change Association to 

meet scarcity of coin . . . .53 

16. Fifty-cent bank note . . . . . .53 

17. Scrip issued to pay paper dividend . . . 54 

18. Town scrip, issued to meet current expenses . 55 

19. Town Loan certificate, issued m panic of 1857 . 56 

20. Same, showing small denomination demanded for 

change 57 

21. Usual form, country bank check .... 60 

22. Check on Second Bank of the United States, 

drawn by President Jackson .... 61 

23. Check drawn by Daniel Webster for $750.00 on 

the Office of Discount and Deposit of the old 
Second Bank of the United State ... 62 

xix 



XX 



ILLUSTRATIONS 



FIGURE 



PAGE 



check 



64 

65 
66 
66 



24. Specially designed payroll check of the Lehigh 

R. R. Co 

25. Specially marked dividend check for use of cus- 

tomers 

26. Private check designed to prevent forgery . 

27. Receipt used as a check to avoid stamp tax . 

28. Power of attorney drawn and executed by Daniel 

Webster in favor of his wife, authorizing her 
to draw checks on his account at the State Bank 
in Boston 

29. English form of crossed check 

30. Usual form of certified check 

31. Cashier's check, used in place of certified 

32. Bank draft — Bank of the United States 

33. Express money order 

34. Letter of credit — Advice 

35. Letter of credit — Indorsement 

36. Traveler's check .... 

37. Brown Brothers' traveler's check 

38. Indorsement and identification of payee 

39. Form of traveler 's check issued by banking house 

40. Form of money order used as traveler's check or 

for remittances 

41. Share of stock in the Bank of the United States 

42. Certificate of common stock (one-fourth actual 

size) 

43. Non-cumulative preferred stock (one-fourth ac- 

tual size) 

44. "Common" of Finance Company (one-fourth 

actual size) 108 

45. "Preferred" of Finance Company (one-fourth 

actual size) 109 

46. Certificate of 34,973 shares of the Standard Oil 

Company Ill 



68 
69 
70 
71 
72 
73 
74 
75 
75 
76 
77 
78 

79 
103 

105 

107 



ILLUSTRATIONS 



xxi 



FIGURE 



PAGE 



gr indorsement 



47. "First Preferred" of Reading Company (one- 

fourth actual size) 

48. Note non-negotiable . 

49. Note, without payee 

50. Note negotiable « . 

51. Negotiable by delivery 

52. Note — joint and several 

53. Interest note 

54. Note with waiver of grace 

55. Signature of illiterate 

56. Note drawn to "myself," requirin 

to make it transferable 

57. "Credit the drawer" note 

58. "Pay to the order of" note . 

59. Indorsement "without recourse' 

60. Indorsed, guarantee of note . 

61. Detached guarantee of note . 

62. "Iron Clad" collateral note . 

63. Collateral note with memorandum on back . 

64. Judgment note with power of attorney 

65. Note with power given of attorney to confess 

judgment 

66. Collateral judgment note 

67. Notice of non-payment 

68. Note with waiver of notice on non-payment 

69. Protested note 

70. Notarial notice of non-payment .... 

71. Notarial certificate of protest 

72. Account stated 

73. Account settled 

74. Statement with receipt 

75. Due bill ...... » 

76. The draft 147 

77. London draft of Bank of the United States . 149 



113 
119 
119 
120 
121 
121 
122 
123 
124 

125 
126 
129 
129 
130 
130 
131 
132 
133 

134 
134 
137 
138 
139 
139 
140 
143 
145 
145 
146 



xxii ILLUSTRATIONS 

FIGURE PAGE 

78. Sight-draft ........ 150 

79. Documented bill — Invoice 152 

80. Documented bill — Bill of lading .... 152 

81. Documented bill — Insurance policy on shipment 153 

82. Documented bill — Draft of consignor . . . 155 

83. Documented bill — Advice of sale of draft . . 156 

84. Mortgage note 162 

85. Short form of mortgage securing note . . . 164 

86. Philadelphia form of indemnity bond and mort- 

gage 166 

87. One of series of issues showing part interest in an 

underlying security ...... 171 

88. Parti-certificate payable in gold .... 173 

89. Certificate actually issued as a receipt for cer- 

tificates deposited for purposes of refinancing 
(one-fourth actual size) 175 

90. Individual private bond . . . . . . 176 

91. Receipt for money deposited on bond purchase 178 

92. Certificate showing part payment in stock sub- 

scription . 179 

93. Unsecured bond, Bank of the United States, for 

sale in London (one-fourth actual size) . . 180 

94. Form of serial bond issued against a mortgage . 181 

95. Individual real-estate bond 183 

96. Guarantee clause — Reading Terminal bonds . 184 

97. Form of indorsement of bonds . . . . 186 

98. General mortgage railroad bond contract . . 188 

99. One of a series of bonds for issue against a car- 

trust agreement 190 

100. Form of contract engraved on car-trust bond . 192 

101. Canceled debenture bond of trust company (one- 

fourth actual size) ...... 194 

102. Form of income bond . . . . . 196 



ILLUSTRATIONS xxiii 

FIGURE PAGE 

103. One of series issued to finance the purchase of a 

railroad and pay off underlying securities . 198 

104. Form of improvement mortgage bond — only the 

written portion shown here . . . 200 

105. Contract extending time of payment, used in re- 

financing the Reading Railroad . . . 202 

106. Certificate without due rate, payable at option of 

payee 205 

107. Interior of large commercial banking house . 247 

108. Interior of private banking house .... 296 

109. Coupon bond of Farm-Mortgage Bank . . 355 

110. Coupons of Farm-Mortgage bond on previous 

page 356 

111. Commercial broker's note 387 

112. Form of letter of release 387 

113. Broker's memorandum of purchase for custom- 

er's account '. 388 

114. Broker's memorandum of sale for customer's 

account 388 

115. Interior of New York Stock Exchange . . 395 

116. Sketch showing layout of floor of Stock Exchange 396 

117. Wire room of E. F. Hutton & Co., New York . 398 

118. Quotation board in broker's office with ticker . 400 

119. Private wiring of bucket-shop .... 403 

120. Interior of large bucket-shop • 405 

121. Map of private wire connections of one of the 

largest branch office houses .... 406 



PAET I 
WHAT ARE FUNDS? 



FUNDS AND THEIR USES 



CHAPTER I 

PUBLIC AND PRIVATE FUNDS 

Property. — Among the first ideas that one gets as a child 
is a notion of respect for the "property" of others; we 
soon come to know that there is a difference between those 
things which we may call "our own" and those things 
which "belong" to another. The teachings of parents 
first impress the lesson ; later, the idea becomes firmly fixed 
through association with playmates and elders. Any 
attempt to violate what are commonly recognized as ' ' rights 
of property" brings us quickly to grief. The jealousy with 
which the child guards his right to use his own top, his 
own marbles, his own knick-knacks, and the respect which 
he comes to have for things displayed in shop-windows or 
in the possession of his playmates, illustrate the force with 
which ideas of property are early impressed upon the race. 

How property is acquired. — No sooner does the child 
come to know the use of things, or begin to long for objects 
that attract his notice, than he learns that the "consent" 
of some one must be obtained before they may be taken. 
From a parent, a sister, or a brother — a member of the 
household — this consent may be had for the asking ; within 
the family, acquisition takes the form of ' ' gift. ' ' In order 
to obtain things from others, however — those not bound 
by ties of affection or duty — a mere request is not enough. 
In front of a shop sits a basket of apples. It has been 

3 



4 FUNDS AND THEIR USES 

placed there by the owner, the shopkeeper, to attract atten- 
tion. The rich color and fragrance of the fruit suggests 
to the passing child that he would like to have some of it ; 
and he seeks to obtain an apple ' ' by gift, " as he had been 
used to doing at home. But his request is refused. The 
mere request of the child is not enough to win the consent 
of the shopkeeper. How is he to obtain the coveted apple ? 
The shopkeeper helps him out of his trouble. "Have you 
a penny ? " ' ' No. " "If you will get me a penny I will let 
you have an apple." With this suggestion the boy gets 
his first idea in finance. He runs to his father; he gets a 
penny "by gift," and, returning gets an apple "by ex- 
change." Thus he learns how the "consent" of shop- 
keepers may be won, and that there is a second method by 
which the property of others may be acquired. 

Exchange the chief method of acquiring property. 
— Exchange lies at the foundation of the world 7 s industrial 
progress. The story of Crusoe serves well to illustrate the 
possibilities of life without it. This lonely man, cast ashore 
on an island, found useful things all around him. But they 
must be gathered, and they must be reshaped and put 
together in a different way than they were found in nature. 
Among a primitive people centuries may be required to 
obtain from nature the metals needed for a few rude 
weapons and tools. We have but to think of the many 
things about the modern household, each of which adds 
something to comfort or pleasure, to realize how incapable 
man would be if he had to make everything for himself. 

How long, for example, would it take a man, working 
alone, to extract from the ore a pound of iron? Even if 
he found the metal, how long must be labor to make a 
needle or a screw ? Few of the common things in use to-day 
could be had at all ; they are each the product of the labor 
of many hands, working with different processes, in dif- 
ferent places, each offering in exchange for things desired 



PUBLIC AND PRIVATE FUNDS 5 

may say, inherited from a society that has labored for 
centuries past. Each thing that we use is the product of 
a great cooperative society, bound together in service by 
the instruments and institutions of exchange. Without 
exchange, cooperation would be impossible. In every in- 
stance, increased facilities afforded for exchange have led 
to a wider range of social and industrial activity. To its 
development we owe the economics made possible by divi- 
sion of labor, the benefits of the factory system, the larger 
returns made possible by mass production and by the direc- 
tion and control of the enormous forces and resources of 
nature, which, when working alone, man has been unable 
to turn to his uses. Every milestone of human progress 
has engraved upon it the significant emblem ' ' Exchange. ' ' 

Importance of funds in business. — Out of exchange 
arises the need for "funds'' — stocks or stores of money or 
other things that can be used as means of purchase and 
payment. In business there is no word so big with mean- 
ing. " If I could get the necessary funds, ' 7 says the black- 
smith, "I would build a wagon shop." The grocer does 
not add to his stock of sugar when the price is low "for 
lack of funds." "We are in need of funds," says the 
building contractor to his partner, "we must have at least 
$1,000 more to pay our men." "Our funds are running 
low," says the miller's clerk, "we must realize on out- 
standing bills, or make some other arrangement to meet 
obligations maturing on the first of the month. " It is out 
of just such situations and just such problems that the 
business of finance arises. ' ' Funds ' ' are the key to business 
under an economy of exchange — a necessary part of busi- 
ness equipment. 

What is business? — John Ruskin calls business a game 
of counters. Business for profit is a contest in which everv 
one uses the same kind of counters — and is striving for 



6 FUNDS AND THEIR USES 

the same thing. One has but to look out on Broadway or 
any busy street of a great city to be impressed with the fact 
that some kind of contest is going on. Men are hurrying to 
and fro, pushing each other about ; each is trying to get 
somewhere, to do something, one does not know why. But 
it is evident that each has something very definite in mind 
and that he is straining every nerve and muscle to accom- 
plish a purpose. What is it that brings these crowds 
together, takes them to the shops, causes some to stand 
behind work benches and sweat before furnaces? Each 
seems to be working and striving in a different way, but 
if you ask the clerk or the f oundryman, the day -laborer or 
the banker, what he is striving for, each will make the 
same answer. And why? Each one has the same wants 
and desires to satisfy. What we call business is the effort 
of individuals and groups to possess themselves of things 
that are useful, either to themselves or others, in a peaceful 
way. And, in so far as they may not wish to use the things 
so obtained to satisfy their own wants, they seek to better 
their own condition by trading with others. The extent to 
which each betters his condition is called his ''gain" or 
"profit." The success of a business enterprise is measured 
by its "profits." The "profits" of a business, as business 
is now done, is the amount of the increase in the money 
value, of properties owned during a period for which the 
gains are reckoned. 

Necessity for law and order in business. — In business 
there is the same need for rules that there is in any game 
or friendly contest. Every contest must have rules to gov- 
ern it, for without rules there would be misunderstandings 
and these would lead to violence. Watch a group of boys 
at play. A number of marbles are placed within a ring ; a 
line is drawn, behind which each player must stand for the 
first throw ; the one who lands his marble nearest the center 
takes first shot. So the rules are laid down for the begin- 



PUBLIC AND PRIVATE FUNDS 7 

ning of the game. After the contest is over each counts the 
marbles which he has driven out of the ring. Each player 
has put in two marbles as ' 'counters." At the end, one 
has scored three; he is one marble ahead, while the other 
player has driven out but one — he has lost a marble. There 
must be a rule for every possible situation and every point 
at issue, otherwise the game could not proceed. The one 
boy would not allow the other to take his marble (his prop- 
erty) unless he did it according to rules understood by both 
at the beginning. The same is true of football, baseball, 
lacrosse, every contest for points. Not only must the rules 
be known, but they must also be strictly observed. In case 
of a dispute as to what the rules are, or how they should 
be applied, the parties may come to a subsequent agree- 
ment, or, failing in this, they may refer the point at issue 
to some one not in the game who knows the rules. He who 
does not play "fair" may have some of his points taken 
away, or, on continued offense, may be "ruled out of the 
game. ' ' 

Business law. — In business the "counters" are money. 
Business law is nothing more nor less than the rules govern- 
ing the contest. The honest man is the one who plays accord- 
ing to rule. A law-breaker not only runs the risk of losing 
points (i.e., of being "penalized") but he may be "ruled 
out." This may be done by his fellows' refusing longer to 
do business with him, or by his being "locked up," — put in 
jail as often as he breaks the rule. Business may be a very 
large game. The whole world is the field, and its rules 
must be understood and observed by all who come into 
common business relations. The laws of business must be 
common to all people trading together. It sometimes hap- 
pens that those known as civilized people attempt to do 
business wtih others who do not understand their rules or 
who have different ones. This is like two sets of players 
entering a football contest, the one trying to play "asso- 



8 FUNDS AND THEIR USES 

ciation ball, ' ' and the other trying to play ' ' Rugby. ' ' Two 
systems of business come into conflict. The rules of the 
one people must be made to conform to those of the other 
or else there will be trouble. The common advantages of 
trade are so great that no one industrial group can afford 
to shut itself off. In fact, no barrier is strong enough to 
preclude men from following up a business advantage when 
it presents itself. This brings the people of all nations into 
constant contact. In the conflicts between systems, the 
stronger forces the weaker to change its rules. The 
importance of obedience to rules of business law is so great 
that nations as well as individuals are made to suffer by 
what is deemed a violation of them. That "honesty is the 
best policy" is a saying trite but true. Whatever may be 
said of the attitude of one nation toward another, no single 
individual can afford to raise even a suspicion of dishonest 
conduct, as this would cut him off from opportunity and 
preclude him from the advantages offered by broader coop- 
eration with his fellows, cooperation made possible by con- 
fidence in fair dealing. To quote a saying of Mr. Croker, 
the old Democratic leader of New York: "No combination 
can be made where all are dishonest and each one knows it. 
The first element of leadership is honesty, perfect honesty. 
The honest man will prevail because other men will trust 
him. A rascal can trust an honest man, but a rascal can 
not trust a rascal. You may take one hundred men, ten 
of them honest and ninety of them false, and put them 
away on an island; come back in two months and, for the 
reasons I have given you, you will find the ten men dom- 
inating the rest. ' ' While Mr. Croker is not often referred 
to for standards of morality, his success as a politician has 
depended very largely upon his recognition of the advan- 
tage of strict integrity among his political followers, and 
the advantage of fair play is even more striking in business 
organization and control. 



PUBLIC AND PRIVATE FUNDS 9 

Elements of success in business. — In every game, two 
conditions are prerequisite to success: (1) An intimate 
knowledge of its rules; (2) Skill in the use of the instru- 
ments employed. In a game the success of which depends 
on teamwork, there is a third requisite — leadership. A 
knowledge of business laws, and skill in the use of the 
instruments and agents by means of which ''gains" are to 
be made, and leadership, are just as necessary to business 
success. Business is organized effort and requires able 
leadership, because of the ever-increasing breadth of com- 
petition that success brings. To the laborer — the one who 
relies for income on the sale of his labor, who subordinates 
his own business or talent to help another work out his 
schemes for gain — a general knowledge of law and of con- 
ditions existing outside the shop, in the market places and 
counting houses, may be of less importance than skill in 
the use of some particular tool ; but he must know enough 
of the rules to play his part well, otherwise he will not be 
able to render service to the manager to whom he engages 
himself. The man who is the head of a business organization, 
who manages a business plant and seeks income from the 
sale of its products must equip himself in a different way. 
He may have less skill in the use of some particular instru- 
ment than has any of the men whom he employs, but he 
must know the use of instruments, and know the manner 
in which they may be used by others to the highest advan- 
tage in order to equip the plant and working force, and 
provide the machinery of exchange and distribution in or- 
der to direct the efforts of those who look to him for leader- 
ship in such a manner as to make largest gains without 
breaking rules. Like a football captain, he must know how 
to manage his men and his plant so as to take advantage 
of every opening without being penalized for off-side plays 
and other infractions. Because business is cooperative, 
each person must be trained and equipped for whatever 
part he plays, and the leader must be able to think. in terms 



10 FUNDS AND THEIR USES 

which will make him the master of every situation which 
presents itself. 

Funds a necessary part of business equipment. — Busi- 
ness training, knowledge of the law, equipment adapted to 
the enterprise, materials, services, all are necessary, but in 
obtaining these the first need is for " funds. " The ac- 
quiring of funds, means of purchase and payment, there- 
fore, may be said to be the first step in providing for busi- 
ness equipment and business success. The term " funds" 
is here used because there is no other in our language that 
is broad enough to convey the meaning. We cannot ac- 
curately use the words "money, " or "credit"; the com- 
mon word which comes nearest to expressing the thought is 
"cash," and yet that has its limitations when considering 
capital funds. In this book therefore ' ' funds ' ' will be used 
as covering or including every form of means of purchase 
and payment. 

Funds, the subject of finance. — Children are frequently 
found on the street asking for pennies. They have learned 
the use of money as a means of obtaining things desired, but 
they have not yet risen above the most primitive knowledge 
of how to get money. Their fathers and mothers may pro- 
vide it by gift, as they would also provide the things which 
pennies will buy, but those not moved by affection or, 
as sometimes happens, by charity, turn a deaf ear to 
appeals of this kind. In early years, "gifts" based upon 
affection afford a means quite adequate, except in cases of 
inability of parents to provide. Generally speaking, girls 
and women throughout their lives are limited to this means 
of obtaining funds. Many men also pass their lives in this 
fashion — they obtain all things desired by means of funds 
contributed. Those who may not depend upon endowments 
of ancestors, and those engaged in active business, have 
quite different financial problems to solve. Finance is that 
branch of business which has to do with the getting and 



PUBLIC AND PRIVATE FUNDS 11 

spending of funds necessary to the equipment and manage- 
ment of enterprise. A student of finance must first con- 
sider what is meant by "funds." When a business man 
says that "his funds are running low," what does he mean? 
Does he mean that his money is nearly all gone? Perhaps 
he has not had more than a dollar in his purse for a week, 
and has had no particular use for that, yet he has been car- 
rying on a large "cash" business all the time— has had no 
lack of "funds." What are "funds"? How are they 
obtained? How are they managed? These three ques- 
tions answered, the whole field of finance will have been 
covered. 

Public finance is that science which deals with the get- 
ting and spending of funds for public uses, as for the 
maintenance and equipment and payment of the debts 
of the government ; private finance is that science which 
deals with the getting and spending of money for use in 
private business. This volume is intended to serve the pur- 
pose of leading the way into both branches — to give to the 
student a descriptive knowledge of the instruments and 
institutions by means of which funds are obtained and 
managed. 

BIBLIOGRAPHY 

Carver, T. N., Principles of National Economy, Part I, Chap- 
ters vi, vii. (Ginn & Co., Boston, 1920.) 

Cleveland, F. A., and Powell, F. W., Railroad Finance, Chap- 
ters i, ii, hi. (D. Applet on & Co., 1912.) 

Hobson, J. A., Evolution of Modern Capitalism. (Chas. Scrib- 
ner's Sons, New York, 1901.) 

A good historical statement of the use of funds in early 
business development. 

Mead, E. S., Corporation Finance. (D. Appleton & Co., New 
York, 1918.) 

A recognized standard discussion of the elements of 
business enterprise. 

Taussig, F. W., Principles of Economics, Vol. I, Book I, Chap- 
ters hi, v, vii. (Macmillan Co., revised, 1921.) 



CHAPTER II 

MONEY FUNDS 

Experience will at once suggest that what we call 
' ' funds ' ' must be something that will be accepted by others 
in exchange for their goods or services — i. e., something 
that others regard as valuable to them in their own business 
transactions. Those things which will serve as "funds" 
to one, must have such qualities that they will serve as 
"funds" to others. By way of illustration let us suppose 
that a blacksmith in Springfield wishes to enlarge his busi- 
ness. To that end he begins to accumulate a store of horse- 
shoe nails. Each week he lays by twelve pounds of nails, 
until at last he has a ton of them. This might serve as 
"funds" in a community where every one desires horseshoe 
nails, but in Springfield not one in a thousand can make 
use of them. With this stock in hand he is not able to buy 
bricks, lime, or machinery, or pay for labor. Horseshoe 
nails are not "funds" in Springfield. The blacksmith, 
however, finds a man who can make use of a ton of nails; 
he exchanges them for ten double eagles of gold. He has 
sold his nails for no other purpose than to obtain something 
that will serve as funds. With $200 in gold he may pur- 
chase the materials and equipment desired. He has 
"funded" his enterprise. 

Definitions — funds. — The whole system of finance grows 
out of the economy of exchange. Where commerce exists 
as a feature of business enterprise, where each member of 
a community strives to do that for which he is best fitted, 
and where each relies on exchange of things produced for 
other things desired, it is to the advantage of each to pro- 
vide himself with "funds" with which purchases and pay- 

12 



MONEY FUNDS 13 

ments may be made. A "fund" is a collection, or store, 
or amount of something by means of which purchases and 
payments may be made. The word "funds" signifies any 
and all things which may be accumulated and which may 
be currently used in a community in exchange for goods 
or properties of others. As has been suggested before, the 
consent of both parties is necessary to an exchange. That 
which will serve as funds must have qualities which will 
induce others to give their consent to part with the things 
which they own, in exchange. Funds that are collected or 
stored up to pay living expenses, or for the purchase of 
comforts and enjoyment, may be called "maintenance 
funds. ' ' They answer the same purpose for an individual 
that a fund would when laid by for the "maintenance" 
of a manufacturing plant. Funds that are collected or 
provided for business equipment are called "capital 
funds." The capital of a business concern is made up of 
funds contributed to it for permanent use. A money or a 
credit reserve laid by for the payment (sinking) of a debt 
is called a "sinking fund." When money is stored up 
for the purpose of hiding it away, and not for use, it is 
called a "safe deposit" or a "hoard." This, however, does 
not properly come within the field of finance. To "fund" 
an enterprise is to provide the means whereby such pur- 
chases and payments may be made as are necessary to its 
success. One whose business it is to provide funds for 
business enterprise is called a ' ' capitalist ' ' ; the manager of 
funds is a " financier " ; he who hoards money is a " miser. ' ' 
A "funded debt" is one for the payment of which some 
definite and adequate provision is made for funds when 
due. To illustrate: A borrows $1,000 from B. A thereby 
procures ' ' funds ' ' for his enterprise ; he funds his under- 
taking; he secures a working capital of $1,000. The 
instrument employed to this end is a contract for the future 
delivery of money which he sells to B for the funds desired. 



14 FUNDS AND THEIR USES 

But before B delivers the $1,000 to A in exchange for the 
note, he demands that some definite provision be made for 
its payment. Complying with this demand, A executes a 
mortgage on his farm as "security" for the payment of the 
note. The mortgage is a conditional deed to his land, the 
condition being that in case A fails to pay the note when 
due, B may sell the farm, and out of the "funds" thereby 
obtained retain enough to pay the note. In other words, 
A sets aside property, in trust, the sale of which will create 
a fund sufficient to pay his debt. 

Two forms of funds. — Funds may be divided into two 
classes : ( 1 ) Those things which pass in the community as 
money; (2) forms of credit, or contracts for the future 
delivery of money. These may be given and accepted for 
the purpose of making purchases and payments. Both of 
these forms are a part of a money economy. Under a sys- 
tem in which credit is used as a means of purchase, the 
necessity for actual delivery of money is in large measure 
avoided. Instead of "money funds" being kept on hand 
by each member of the business community, a few indi- 
viduals or institutions hold a large store of money "in 
reserve, ' ' and the business community makes its arrange- 
ments with them for forms of credit which will serve their 
financial needs more readily than money itself. The money 
demands and money uses are largely demands for and uses 
of money for settlement of credit balances. In all modern 
systems of finance, by far the greater part of business enter- 
prise is "funded" by means of credit. The manner in 
which this is done will appear later. 

Money Funds 

Essential characteristics of money. — Two qualities or 
characteristics are essential to money. In the first place, 
those things which are used as money within a given com- 
munity must exist in such quantities as to allow the various 



MONEY FUNDS 15 

members of the community to collect them into ' 'funds" 
large enough to make the purchases and payments neces- 
sary for their business undertakings. A people can not use 
as money that which they do not possess; the thing 
employed must exist in such quantities that it may be had 
when needed. In the second place, the money commodity 
must be so highly valued by all that it will readily be taken 
in exchange for goods offered for sale. No two persons may 
place the same estimate of value upon it ; judgments of 
value of the money commodity may differ as widely as its 
various uses, but value it must have in the judgment of all 
with whom exchanges are to be made. Otherwise a busi- 
ness man could not get together, or offer, enough of the 
commodity to cause another to think that he would profit 
by an exchange. 

Conditions on Which the Fundability and Value of 

Money Depend 

A money fund must admit of division into units. — To 

this end the things accumulated for use as money must 
admit of being divided with such accuracy as to enable 
one readily to calculate the amount or portion on which 
his judgment of value is to be based. If, for example, 
some one offers a horse for $100, it must be known at once 
just how much gold is intended before one can form a 
judgment as to whether he would prefer the gold or the 
horse. The money offered must admit of division into 
comparatively uniform units. In a pastoral community 
sheep may be used as money; a flock of sheep may be 
divided into units. One hundred sheep or fifty sheep have 
a very definite meaning. There is uniformity enough about 
the primitive sheep to satisfy the judgment of the primitive 
man. Then, instead of judging the comparative values 
of a goat, an ox, a horse, and a stack of fodder in terms 



16 FUNDS AND THEIR USES 

of dollars as we do now, the party having' all of these 
things for sale might offer the goat for 5 sheep, the ox for 
10 sheep, the horse for 20 sheep, and the stack of fodder 
for 15 sheep. Each member of the community having 
sheep would then have to consider whether 5 sheep 
would be of greater value to him for purposes of 
trade or for other use than the goat; whether 10 sheep 
would be more useful than the ox, etc., and on the result 
of his judgment, in the bickerings among those making 
estimates and offers, would depend the agreement as to 
price. 

Money funds must be uniform in quality. — Since prices 
must be made and quoted in terms which will be under- 
stood by others, it becomes necessary to have some common 
standard of judgment in estimates of value. Without such 
a standard one trader would not be able to make himself 
understood by another. If I were to ask you the value 
of a certain piece of land, you would not be able to express 
your thought or conclusion in answer to the question unless 
you could appeal to some standard or measure of value 
which was known to me. The same is true in making a 
trade. In this case the one offering goods for sale does 
not volunteer his estimate of value, but by offering the 
goods for a definite sum of money both parties find in the 
price a common standard for judgment. Unless, however, 
the money funds in which the offer is made are uniform 
in quality there can be no judgment as to the relative value 
of the thing offered and of the price to be received. In 
other words, as between the various units which go to make 
up the money fund, the judgment of value must be prac- 
tically the same. Without uniformity, such expressions 
as a dollar, a sheep, a bushel of wheat, or whatever the 
thing used as money, would have no uniform meaning. 

Money funds must have durability. — The thing used 
must likewise have such durability as to protect it from 



MONEY FUNDS 17 

immediate decay. There must be no fear of loss or damage 
while the thing used is held in the form of funds. Lack 
of durability would render uncertain all judgments of 
yalue for future use. It would make exchange itself so 
far a subject of chance as to render impossible all estimates 
of an advantage to be "gained" from a business transac- 
tion. When calculation of value for future use is made 
difficult, exchange as a regular part of the industrial sys- 
tem is hampered. 

Money funds must admit of being carried about. — 
Money funds must be adapted to being carried about or 
passed from one person to another without great incon- 
venience. Nothing can serve as money unless the fund 
accumulated can be easily handled. Lands, houses, and 
country estates cannot be used on this account. There are 
other qualities which may add to the value of a thing to 
be used as money, but the foregoing may be said to be 
necessary to adapt it to the purposes of exchange. Each 
and all of these qualities must be possessed to some extent. 
Some things are more easily carried about than others; 
some are more durable than others, while some may be more 
uniform or more easily divisible, but no one of these charac- 
teristics must be wholly wanting in the thing used as money. 
The greater the degree in which all are present, the more 
serviceable will be the substance employed. 

Things That Have Been Used as Money 

Skins. — In a given community those things will be used 
for money that will give greatest ease to exchange. Among 
one people, each family may grow a little corn, may have 
a few horses or cattle, may possess various rude weapons 
or utensils for domestic use, may also have provided for 
themselves shelter. They, however, are a hunting people; 
meat is perishable ; for long periods tney may be entirely 



18 FUNDS AND THEIR USES 

without corn. At times horses may be had, but they are 
not obtainable by all; weapons are in great variety and 
size, and adapted to the strength and skill of those using 
them. The tribe is migratory and often changes its loca- 
tion. Among such a people the things best adapted to serve 
as money may be the skins of animals. 

Dried fish. — Another people may live under quite sim- 
ilar conditions, except that they get a large part of their 
substance from fishing. The things that best lend them- 
selves to their use as money are dried and smoked fish or 
clams. These will last for years, and there is always a 
demand for them as food. When fish are scarce the dried 
products will be more highly valued; when plentiful, they 
will be prized less; but at all times they will have some 
value due to their usefulness and to the labor entailed in 
procuring more. 

Live stock. — Under other circumstances a people may 
develop a pastoral life. With them their flocks and herds 
furnish that which serves them best as money. Many of 
our financial terms have come from such a practice: pecus 
was the Latin name for kine — cattle ; pecunia came to be 
the Latin word for money ; we have from this such words 
as pecuniary, pecunious, impecunious, peculation, etc. 
They counted their money (cattle) by the head (per cap- 
ita), and their kine were their capital. Our money is our 
capital ; our goods are our chattels ; our kine are our cattle; 
In old England scot was a tax or fee ; this presumably came 
from the Saxon scot, meaning cattle, and "scot" was used 
when taxes were paid in kind. Our expression, to go "scot 
free," comes directly from this use of the word — that is, 
free from taxes or fine. 

Agricultural products. — In communities where agricul- 
ture prevailed, some forms of agricultural products were 
found to be most serviceable in making exchange ; wheat, 
oats, and barley were used in Europe for centuries ; maize 



MONEY FUNDS 19 

was employed among the Indians of Central America; 
where olive-oil, cakes of dried fruit, cocoanuts, and tea 
have been largely produced they have served peoples as a 
means of exchange. 

Advantages and disadvantages in the use of these 
forms of money. — Both the advantages and disadvantages 
of the use of these primitive forms of money are apparent. 
By their use many of the economics of exchange were 
secured and many of the difficulties of barter were over- 
come ; but still commerce could not be carried on with ease. 
All of the things used possessed the qualities essential to 
money, but none possessed them in high degree. All had 
qualities which caused them to be valued, but judgments 
of value varied widely with each individual. All admitted 
of division, but division, in most cases, could not be made 
with exactness. There was little uniformity, therefore 
judgment was hampered as to the value of a unit of kind. 
Their durability was not great. Many of them could not 
easily be passed about from hand to hand. Yet, with all 
these faults and disadvantages, they were the best that the 
people using them could provide; it required centuries of 
social and industrial progress for these peoples to acquire 
those things which would serve them better. 

The base metals. — Every increased facility given to 
exchange gives a wider range to social, political, and indus- 
trial activity. With the growth of intelligence, with the 
higher development of industrial processes and artistic 
skill, metals were brought into use which possessed qualities 
better adapted to serve as funds. Copper, tin, iron, zinc, 
brass, and other alloys, came to have currency. Even when 
these were comparatively scarce, they were to be had in 
such quantities as to allow the accumulation of "funds' ' 
sufficient to serve the community in exchange, and were 
so far superior to agricultural products that the latter be- 
came supplanted. Iron was at one time used; but when 



20 



FUNDS AND THEIR USES 



iron came to be so plentiful that it was used for weapons, 
household implements, plowshares, etc., the estimate placed 




Fig. 1. — Copper-sheet Money. 



on the value of iron, as compared with other things, was 
so small that one could not easily accumulate and carry 



MONEY FUNDS 21 

about a fund large enough to make the necessary purchases 
of the goods. Thus, with increased use of iron for other 
purposes, it became unfit for use as money, because of the 
great amount necessary to an exchange — i. e., it lacked so 
far the element of convenience that other metals were pre- 
ferred. In time, the same came to be true of tin, zinc, and 
to a large extent of copper, brass, nickel, and other metals. 
A good illustration of the inconvenience attending the use 
of copper is furnished in the illustration on page 20. The 
copper sheet from which the engraving was made is 14 
inches long, 9 inches wide, and weighs 7 pounds. It bears 
the stamp of a Swedish sovereign. It may be called a 
Swedish four-dollar-bill of 1744. Imagine taking a few 
of these to market to do a little shopping ! 

Ornaments. — Strange as it may seem, the world's best 
moneys have come from materials used for ornament. This, 
however, follows naturally. The desire for ornamentation 
is general. It arises out of a desire for distinction among 
one's fellows. Those things that are used for decorative 
purposes are things not common. Things that will serve 
a particular people for ornament will be desired by all — 
that is, they possess qualities which will cause them to be 
highly valued. In both money and ornament the element 
of value brings them into close relation. If the things 
desired for decoration possess the other qualities essential 
tp money, the two uses may be concurrent. Fishermen 
have polished the vertebra? of fish and used them for beads ; 
the American Indian has polished the ends of black and 
white shells and strung them; wampum-peag (sometimes 
called wampum, or peag) was used for money by the In- 
dians. In Massachusetts, when the money which the Eng- 
lish people were used to became too scarce to serve them 
in their exchanges, they reverted to the use of the Indian 
wampum ; the general court of that colony made this legal- 
tender currency among the settlers at a fixed rate to the 



22 FUNDS AND THEIR USES 

amount of 40 shillings. Ornaments of various kinds have 
been used for money. Many of them have great durability ; 
they accumulate from one generation to another until they 
are possessed by members of the tribe in quantities suffi- 
cient to answer the purposes of money. When these things 
serve exchange better than the less durable products, they 
often come to be the only money used. 

Gold and silver. — Gold and silver were first used for 
ornament alone. For many centuries they were too scarce 
to serve as money — to be accumulated as money funds. 
This is still true among some peoples. These metals finally 
came to be the generally accepted money in civilized na- 
tions. Under modern industrial conditions these metals 
are in every way better adapted to money uses than other 
materials are. They are universally prized ; they admit of 
accurate division, and units of value may be exactly deter- 
mined; they are easily refined, and may be given exact 
uniformity of quality; they have great durability, do not 
easily corrode; they exist in quantities sufficient for cur- 
rency, but are not so plentiful that it is necessary for a 
trader to encumber himself in his effort to have on hand 
a store large enough to effect exchange ; funds of gold and 
silver being highly valued may be easily passed from hand 
to hand. For these reasons they are more useful as money 
in civilized communities than the "baser metals." They 
also serve better than the other "precious" metals; better 
than platinum, because platinum is too scarce ; diamonds 
and precious stones are easily broken and destroyed, are 
not divisible into equal parts, are not uniform in quality. 
Gold and silver not only possess the qualities essential to 
money in a high degree of perfection, but also admit of 
stamps and other marks of authority which give certainty 
as to weight and fineness. Coins made of these metals are 
easily distinguished from counterfeits; they have charac- 



MONEY FUNDS 23 

teristics which permit traders most easily to arrive at a 
conclusion as to value and to agree on a price. 

The development of a standard. — With all primitive 
people several commodities are indiscriminately used as 
money. Such a money system multiplies the difficulties of 
exchange. If skins be used, then an ox may, by one man, 
be estimated as having a value equal to 10 bearskins ; 
another may compare the value of the ox to 20 raccoon 
skins ; a third may use the fur of the mink as his basis 
of comparison; a fourth, having an assortment of skins, 
might offer 2 bearskins, 6 raccoon skins, 10 mink skins, and 
15 skunk skins. With such a money it is difficult to come 
to a conclusion in trade. Commercial transactions become 
involved ; the bickering necessary to a sale is a long process. 
Exchange with such a money would be little better than 
barter. Metallic money may quite as much encumber a 
transaction. Before the development of a system of exact 
coinage the money metals often had stamped upon them 
marks of private houses or of government which guar- 
anteed their fineness. They were then clipped up or cut 
into pieces to serve the purposes of the transaction in which 
they were used. The illustration on the next page is a 
copy, slightly reduced, of a Japanese sheet of silver bear- 
ing such marks of guarantee ; in whatever way it might be 
cut, each piece" would still carry with it a stamp. After a 
system of exact coinage was introduced, the problem of 
the different values placed upon each metal had still to be 
solved. A gold coin and a silver coin might each bear the 
stamp of "one pound sterling," yet each would pass at a 
different valuation. Each metal added to the currency in- 
creased the confusion. Attempts have been made to avoid 
this trouble by using a fixed legal ratio between coins of 
different materials. Such devices, however, have often 
proved futile, for traders were constantly passing judg- 
ment on the comparative values of the coins used, and when 




Fig. 2. — Silver-sheet Money. 



MONEY FUNDS 25 

the values of these did not correspond with the ratios in- 
tended, each stipulated the metal he would receive in ex- 
change. After many failures, an expedient was hit upon 
which allowed several kinds of money to be used at the 
same time and all of the estimates of value to be compared 
with one metal. This was done by what is known as "the 
establishment of a standard. " In a complex system of 
money, the standard is a coin composed of a certain amount 
of metal of a particular kind, having prescribed weight and 
fineness, for which all other coins may be exchanged at a 
fixed ratio. The weight and fineness of the other coins are 
prescribed, but it is by a process known as redemption that 
their relative values and ratios of exchange are maintained. 
It is this device that lies at the foundation of modern grad- 
uated systems of money. 

The decimal system. — As before observed, the evolution 
of the modern money system is a long and involved process, 
one which depends on the development of higher intelli- 
gence, broader association, and improved methods of so- 
cial, political, and industrial cooperation. With modern 
methods even barter would not be as cumbersome as money 
exchange under more primitive systems. In fact, modern 
facilities for comparison of wants and of goods by adver- 
tisement and other means of intelligence, allow of many 
things being exchanged by a system of barter in preference 
to sale and purchase. Some newspapers and circular pub- 
lications are devoted to this, and their support is the best 
testimonial to their success. With all our improved 
processes, however, with all our modern adaptations, there 
are still many of the old difficulties that persist. A com- 
parison of the complex, lumbering English system of money 
with our own will serve to illustrate the economics intro- 
duced by later experience and better adaptations. Ex- 
changes and accounts in pounds and shillings and pence 
necessarily burden English commerce with an enormous 



26 FUNDS AND THEIR USES 

expense of time and energy. It is a burden similar to a 
tax on trade. If the amount of time that is saved to our 
nation by the decimal system of money were to be com- 
puted, the result would be startling. Let us assume that, 
by means of the decimal system, twenty minutes per day 
were saved to those engaged in commercial transactions 
and accounts ; with 5,000,000 people employed in this man- 
ner, there would be an economy of over $100,000,000 per 
annum. In the United States, however, we are still en- 
cumbered by older systems of weights and measures. It is 
to be hoped in the interest of economy that a decimal sys- 
tem may ultimately be adopted for these calculations. 
Another economy in exchange that has been worked out by 
Americans comes through our broader social, political, and 
industrial organization. Throughout the United States 
and Canada we have practically one standard and one sys- 
tem of money. The business of this Continent is freed from 
the multiplicity of computations necessary to deals in 
Europe and other parts of the world. Gradually the world 
is working toward uniformity in standards and uniformity 
in monetary systems. The result is a higher economy — 
increased facility in making commercial judgments, and 
increased advantage in commercial exchange. 

The Money System of the United States 

The "dollar" the central fact in our system. — The cen- 
tral idea of the American money system is the "dollar." 
What is a dollar? This question has been the subject of 
volumes of discussion. The answer to the question has 
become involved in a wilderness of theory — lost in a maze 
of abstractions — as a result of which the reader is led to 
believe that there is great difficulty in understanding just 
what a dollar is. Fortunately we do not have to read all 
this literature and wrestle with all the hypothetical prob- 



MONEY FUNDS 27 

lems propounded. The whole matter is settled by one sec- 
tion of the United States statutes. The Act of February 
12, 1873 (Sec. 14), establishes "25.8 grains of gold" *%L 

' v ' ' ° ° • 1000 

fine (or 23.22 grains of fine gold), which bears the required 
stamp and impress. The statute says that this is. a dollar — 
not that it resembles a dollar, or that, for the purposes of 
discussion, it may be considered a dollar, but that it is a 
dollar. Furthermore, the statute again cuts off all contro- 
versy regarding the worth of a dollar ;■ for it says that .the 
dollar (the printed piece of gold containing 25.8 grains of 
gold ?^L_fine) "shall be the unit of value" in our money 
system. 

Gold coins of the United States. — But what about the 
other forms of money in our complex system ? In the first 
place, there are six kinds of gold coin, viz., the "dollar," 
the "quarter-eagle, "the "three-dollar" piece, the "half- 
eagle," the "eagle," and the "double-eagle." What about 
these? They must contain exactly the proportions of 1, 
2%, 3, 5, 10, and 20 in weight of gold of uniform fineness 
( ?^L_ ). The statute does not provide how much the sev- 
eral pieces enumerated shall be worth. But the weight and 
fineness of metal being established for each, they pass in the 
community and are "valued" by business men at $2.50, 
$3, $5, $10, or $20, as the case may be. That is, a piece of 
gold which has 51.6 grains of gold is valued at just twice 
as much as a piece containing 25.8 grains. If, therefore, 
the latter is one dollar, the former would be valued at $2. 
They all pass "at par" by virtue of this exact proportion 
of gold having the same quality and fineness, and thus the 
"three-dollar" gold piece will pass interchangeably for 
three ■' ' one-dollar ' ' pieces. 

Silver coins of the United States. — We also have in our 
system "silver dollars," "half-dollars," "quarters," 
' ' dimes, ' ' etc. The statute prescribes just how much silver 



28 FUNDS AND THEIR USES 

there shall be in each, of i^L fine, and what stamp and 
impress shall be put on them. The law does not attempt to 
prescribe how much these coins shall be worth; it simply 
makes provision for their form* weight, and fineness. The 
Government also holds itself ready to exchange a silver 
"dollar" for a gold "dollar," and with this lets each man 
decide for himself how much it is worth. 

Minor coins. — Minor coins are also a part of our metallic 
money equipment. The five-cent pieces, "nickels," and 
"cents" add to convenience in making exchange. "What 
is a 'nickel'?" or "What is a cent?" may be determined 
in the same manner as "What is a silver dollar?" They 
are pieces of metal, of definite form, weight, and quality, 
which the Government agrees to exchange for gold coins at 
the rate stamped on their faces. 

Paper money in circulation. — Besides the gold, silver, 
nickel, and bronze metallic moneys there are eleven classes 
of paper moneys in circulation, each of which has a def- 
inite provision for form and design. Paper money is 
issued in denominations of $1, $2, $5, $10, $20, and higher 
multiples. Each is in the nature of a promise of the Gov- 
ernment, directly or indirectly, to deliver the number of 
dollars (gold) for which it is issued. 

United States notes or greenbacks. — The United States 
notes (greenbacks) are promises of the Government to pay 
to the holder a definite number of gold or silver dollars 
"on demand." For example, a "two-dollar greenback" is 
one which has written upon it the promise of the United 
States to pay to the bearer on demand two gold or silver 
dollars. Silver dollars, however, are exchangeable for gold 
whenever gold is desired. Therefore it is entirely optional 
with the holder as to which will be received. 

Gold certificates. — The Government, recognizing the in- 
convenience of carrying about a large fund of gold, has 






MONEY FUNDS 29 

made provision for the deposit of gold funds in the Treas- 
ury, either as coin or bullion, in any amount in which they 
may be accumulated, against which an equal amount of 
gold certificates, or certificates of gold deposit, is issued. 
Thus one holding the certificates may, ' ' on demand, ' ' have 
the gold ' ■ dollars ' ' or the money value of bullion deposited. 

Silver certificates. — The silver certificate is issued for a 
similar purpose. Silver money is about sixteen times as 
heavy as gold money. To carry about a large fund of it 
becomes impossible ; even small sums are very inconvenient 
to handle. By allowing a deposit to be made and cer- 
tificates of deposit to circulate as money in their stead, 
the public is served in every manner the same as by 
the use of the coin. At the same time, if gold is pre- 
ferred, they may be exchanged for gold 'when presented 
for payment. 

Currency certificates. — The holders of small denomina- 
tions of "greenbacks" find that it takes a long time to 
count out large sums with accuracy. As a means of avoid- 
ing this, small bills may be deposited to the amount of 
$10,000 or multiples thereof, and one or more bills or "cur- 
rency certificates" may be issued to represent the amount 
deposited. Thus, for the transfer of $1,000,000 it would 
require only one hundred bills of the lowest denomination. 
These, as may readily be seen, are indirectly exchangeable 
for gold. 

Treasury notes of 1890. — Similar privileges were for- 
merly given to owners of silver bullion. Instead of requir- 
ing the owner to have his metal coined before putting it 
into circulation, the Government allowed him to deposit the 
bullion at the coinage value and receive certificates which 
entitled him to withdraw silver coin. Thus the Government 
had the metal for coinage if occasion required it. The 
certificate became indirectly exchangeable for gold "dol- 
lars" in the same manner as "silver certificates." Since 



30 FUNDS AND THEIR USES 

1900 these notes of 1890 have been gradually withdrawn 
from circulation and cancelled. 

Fractional currency notes. — Fractional currency notes 
were issued for small change during the civil war when 
gold and silver were scarce. They were issued in fractions 
of a dollar, and were derisively called "shinplasters." 
They have been canceled as fast as presented at the Treas- 
ury, but there are still about $6,000,000 outstanding. 

Old demand notes, compound interest notes. — Old de- 
mand notes and compound interest notes are forms of cur- 
rency similar in character to the greenback, except that the 
latter bears compound interest at the rate stated in the 
contract. They are in the nature of promises of the Gov- 
ernment to pay, on demand, gold or silver in exchange. 

National bank-notes. — A national bank-note is a promise 
of a national bank to pay to the holder, or bearer, on presen- 
tation, the amount named in the bill in legal-tender money 
of the United States — i. e., in gold, gold certificates, silver 
coins, or greenbacks. This makes the bank-note indirectly 
convertible into gold at the option of the one owning or 
holding it. 

Federal Reserve bank-notes. — These notes are similar to 
the national bank notes except that they are issued by the 
Federal Reserve banks. They are secured by Government 
bonds or short time obligations deposited with the United 
States Treasury. Since 1918 they have increased rapidly, 
taking the place of a large number of silver certificates and 
silver dollars. These notes are not legal tender, but are 
receivable for all public dues except duties on imports. 

Federal Reserve notes. — These notes are issued by the 
Federal Reserve Board through the Federal Reserve banks 
and are obligations of the Federal Government as well as 
of the banks. The types of security used as a basis of issue 
are carefully prescribed by the Federal Reserve Board. 
These notes are not legal tender but are receivable by 



MONEY FUNDS 31 

Federal Reserve banks and also by the Government for 
taxes, customs and other public dues. 

The uniformity of value in our system. — In none of 
these forms of money does the Government attempt to say 
how much it is worth. It simply determines what a "dol- 
lar" is — i.e., it represents that a dollar is a coin of the 
United States containing 23.22 grains of fine gold with one- 
tenth of alloy to prevent abrasion. It then agrees to ex- 
change all forms of money, other than gold, for coins of 
that metal, and supplies itself with a reserve fund of gold 
to this end. The public is left to place its own value on the 
gold ' ' dollar ' ' as well as on all other coins and bills in the 
system. The process of redemption operates to make the 
estimates or valuations of all kinds of dollars alike. The 
value of a "dollar" of any kind is therefore the value of 
23.22 grains of pure gold. 1 

BIBLIOGRAPHY 

Annual Reports of the United States Treasurer, including the 

reports of the Director of the Mint. 
Conant, C. A., Principles of Money and Banking, Vol. I, 

pp. 1-31. 
Dewey and Shugrue, Banking and Credit, Chapter ii. (Ronald 

Press, 1922.) 

i Varying Value of Gold. — Gold itself may vary in its purchas- 
ing power; and, although the standard 23.22 grains of pure gold 
remains the dollar, still that quantity of gold may not continue to 
exchange for the same amounts of other commodities that it for- 
merly exchanged for. This fact is best appreciated by comparing 
the number of bushels of wheat or the pairs of shoes for which a 
ten-dollar gold-piece (232.20 grains of pure gold) will exchange 
to-day with the quantity of wheat and shoes it exchanged for in 
1900. If such a comparison is made it will appear that 232.20 
grains of pure gold will buy about half the quantity of such other 
commodities as it did in 1900. The purchasing power of pure gold 
is less to-day than it was in 1900. This is what is meant by saying 
that the value of gold varies. And since our dollar is defined as a 
certain quantity of gold, the purchasing power of the dollar varies. 

This sometimes causes an injustice to individuals in the settle- 
ment of long-standing debts. One hundred dollars in gold lent by 



32 FUNDS AND THEIR USES 

Jevons, W. S., Money and the Mechanism of Exchange. (D. 
Appleton & Co., 1896.) 

Taussig, F. W., Principles of Economics, Vol. I, Book III, 
Chapters xvii to xxii. 

This book in Taussig's "Principles" is entitled "Money 
and Mechanism of Exchange," and is perhaps the best short 
account of the fundamentals of money and banking that 
has been written. 

White, Horace, Money and Banking, Book I. (Ginn & Com- 
pany, 1914.) 

A standard short work dealing with the principles and 
history of money and banking. 

Mr. A to Mr. B in 1900 would have been worth at that time per- 
haps 100 bushels of wheat or 35 pairs of shoes. To-day, when Mr. 
B pays back the one hundred gold dollars, they are worth to A 
perhaps only 50 bushels of wheat or 12 pairs of shoes. Thus Mr. A 
lent the equivalent of 100 bushels of wheat or of 35 pairs of shoes 
and gets back only the equivalent of 50 bushels of wheat or of 12 
pairs of shoes. Proposals have been made, especially by Professor 
Irving Fisher of Yale, to stabilize the purchasing power of the 
dollar; but as yet there are certain difficulties encountered in inter- 
national payments, which seem to render these proposals imprac- 
ticable at least for the present. 



CHAPTER III 

CREDIT FUNDS 

Definition of credit. — Credit is a contract made be- 
tween two parties whereby the one promises to deliver a 
certain amount of money to the other at a specified time. 
This contract, or promise, may be written or oral, formal 
or informal, expressed or implied, but in each case the 
essential fact is the same — a contract for the future deliv- 
ery of money. A " credit transaction" is one in which a 
promise to pay (i. e., a contract for future delivery of 
money) is exchanged for something else of value. When 
one deals "on credit," he deals on his own promises to 
pay, or contracts for future delivery, instead of money; 
when one buys with (i. e., "on") credit, he purchases goods 
and gives his obligation to pay, in exchange ; when one sells 
for (i. e., "on") credit, he transfers his goods to another 
in exchange for the promises of that other to deliver a defi- 
nite sum of money at a definite future time. 

Illustrations of Credit Uses 

Morgan is a young man of sober, industrious habits, is 
well trained, and has a good reputation in the community 
where he lives. He decides to begin business for himself. 
He goes among the farmers with whom he is acquainted, 
and asks them if he may become their agent for the sale 
of grain in Chicago. A list of clients is scheduled which 
seems to warrant the opening of an office. But he has no 
capital, and it will require at least $1,000 in "funds" to 
equip and manage an office where he can display his sam- 

33 



34 FUNDS AND THEIR USES 

pies, meet prospective buyers, manage consignments, etc. 
He lays his plan before his friend Drexel, who has an 
abundance of means and who makes it his business to sup- 
ply funds to those who have need for them in business. 
Morgan explains his plan, shows his assured list of clients 
and his business prospects, and proposes to Mr. Drexel that 
if he will give to him $1,000, then he (Morgan) will execute 
to Drexel a contract in writing for the delivery of $1,100 
one year hence. Mr. Drexel has confidence in the honesty of 
young Morgan, and after studying his plan of undertaking 
and his prospects of success, he decides to exchange $1,000 
for Morgan's contract to deliver $1,100 one year hence. 
No money passes, however. Morgan hands to Drexel his 
"note" for $1,100, and Drexel gives to Morgan his "check" 
for $1,000. Morgan takes the check to the bank and pre- 
sents it, and the cashier transfers $1*000 from the credit 
account of Drexel to the account of Morgan. That is his 
capital. This credit account is the "fund" with which 
his business is begun. 

Credit as current funds. — Morgan now goes to Chicago, 
where he has the credit account transferred to a bank. He 
rents and equips an office. He forms business relations with 
an old and reliable produce broker who has a seat on the 
Board of Trade, and agrees to divide commissions with him 
until, finally, he is able to purchase a seat of his own. He 
devotes himself to building up and enlarging his clientage. 
By advertisement and constant effort he gains good will; 
he arranges with the bank to carry the margins of speculat- 
ing clients ; he finds constantly increasing profits in his com- 
missions. A business which at first netted him only enough 
to meet office and personal expenses, after years of effort 
nets him $10,000 per month. During this time he has paid 
the original loan from Drexel, bought a seat on the produce 
brokers' board (the Board of Trade), and at a mature age 
becomes possessed of many valuable properties and securi- 



CREDIT FUNDS 35 

ties. All of this has come to him from the use of credit, 
from untiring energy, from thrifty habits, and an unim- 
peached integrity. He now wishes to retire from the busi- 
ness of brokerage and to lead a more quiet life, devoting 
only such time to business affairs as may be necessary to 
the care of his investments. 

A credit purchase. — Gates, a young man of wealth, and 
a friend of Morgan, desires to engage in the business of 
brokerage. He does not wish to spend a life of hard com- 
petitive effort in building up a new business; he prefers 
to buy a business already established. He goes to Morgan 
for advice, and, each recognizing an opportunity, a bargain 
is made, whereby Gates agrees to pay $50,000 for Morgan's 
seat on the Board, and $250,000 for the business name of 
his firm. That is, Morgan retains all the securities, ac- 
counts, and investments acquired by him in course of 
business ; he sells his seat (his opportunity to trade on the 
Board) and his "good will" (or business reputation) for 
the sum of $300,000. But how is this to be paid for ? Does 
Gates count out standard gold coins to that amount? No. 
He does not even pass to Morgan his check. Finding that 
it will be advantageous to retain his present available 
"funds" for use in the business, it is arranged that the 
purchase shall be made ' ' on credit ' ' ; that is to say, Gates 
offers to Morgan three promissory notes for $100,000 each, 
due in one, two, and three years respectively. The pur- 
chase price of the business is $300,000, as agreed, but in 
consideration of the time that payment is deferred, Gates 
further promises to pay 5 per cent interest on the respective 
amounts until they are paid. By these several contracts 
(agreements for the purpose of exchange) Gates promises 
to deliver $115,000 at the end of the first year, $110,000 at 
the end of the second year, and $105,000 at the end of the 
third year — $330,000 in all, principal and interest — in- 
stead of $300,000, the purchase price if payment had been 



36 FUNDS AND THEIR USES 

made in money at the time the business was delivered. Now 
note just what has taken place. Morgan has sold what? 
Nothing tangible; nothing that may be seen; nothing that 
may be passed from hand to hand. He has disposed of his 
business opportunity and his business reputation as a 
broker — nothing else. Morgan may still do business in any 
other way so long as he does not attempt to use his seat on 
the Board or the name and reputation of his old firm for 
the business of brokerage. And what has he received? 
Something tangible ? Something that may be seen f Some- 
thing that may be passed from hand to hand? Yes, but 
what is it? Is it gold? Is it money? No. What is it? 
"Paper." One slip reads as follows: 

$100,000.00 New York, January 1, 1922. 

One year after date, for value received, I promise to pay to Morgan 
or order One Hundred Thousand Dollars in gold coin of the United 
States, of present weight and fineness. With interest at the rate of 5 
per cent per annum from date until paid. 

[Signed] Gates. 

The other two slips read exactly the same way, except 
as to date of payment. But suppose Morgan loses these 
slips of paper, or that they are destroyed by fire, is the 
credit destroyed? Not at all. The obligation to pay re- 
mains as before ; if Morgan can prove the loss and likewise 
the amount due, he can enforce the payment. These slips 
of paper are only evidence of the credit agreement, which 
in itself is a thing as intangible and as invisible as that for 
which it was given — viz., business opportunity and business 
reputation. Still, credit is bought and sold in the market; 
in fact, credit is one of the chief items of exchange in mer- 
cantile business. 

Essential Characteristics of Credit 

Credit arises out of exchange. — Good-will, membership 
in a society of brokers, business opportunity and reputation 
are the properties that have changed hands. They have 



CREDIT FUNDS 37 

not been given away. None of them has been exchanged 
for another — they have not been bartered, yet no money 
has passed. They have been bought and sold, full payment 
has been given and received, and the full title has passed. 
What represents the other side of the transaction? As a 
result of the exchange there came into being, and still exist, 
Gates's notes for $330,000. All these promises have pur- 
chasing power, and so long as they exist they may serve 
again and again in any number of transactions until paid, 
or until their values are lost by depreciation. 

The principles of exchange as applied to credit. — To 
understand the nature of credit it may be well to reflect 
on the underlying principles of exchange. In the first 
place, why did Morgan and Gates trade? Morgan had a 
business that was bringing him in a net profit of $10,000 
per month — $120,000 per year. This was its net income- 
producing power to him. Much of the return was due to 
continued personal effort, but the reputation of the firm was 
so well established that its clientage in large measure would 
be retained, though its management were changed. Mor- 
gan, however, wished to avoid the nervous strain and the 
responsibilities of an active broker. In his judgment he 
would rather have $300,000 in gold than the "business which 
he has sold — i. e., he estimated or valaed $300,000 more 
highly than the business. Gates, on the other hand, would 
rather have the business than $300,000 in gold ; each found 
the transaction to his advantage and $300,000 was agreed 
upon as the price. Here was a difference as to valuation 
but an agreement as to price, and the exchange took place 
as a result. 

Value and price of credit. — Now after the price has been 
agreed upon there follows another transaction. Instead 
of Gates delivering the $300,000 in gold first agreed upon 
as the price, he offers to Morgan his three notes, each for 
$100,000, with interest — obligations for the future delivery 



38 FUNDS AND THEIR USES 

of money, amounting in all to $330,000 when due. Morgan 
accepts these in lieu of the $300,000 in gold. Why does 
Gates offer the notes, and why does Morgan accept them? 
Gates offers them because he values $300,000 in gold more 
highly than the notes. Morgan accepts the notes because 
in his judgment they are quite as valuable as $300,000 
in gold. Morgan indorses the notes and sells them 
for $305,000. Why does the purchaser offer, and Morgan 
accept, that amount? Manifestly, because the purchaser 
thinks the notes of greater value to himself than $305,000, 
while Morgan esteems the $305,000 more highly. The pur- 
chaser of the notes is an investor in commercial paper; he 
gets his income from furnishing current funds to those who 
wish to sell credit on terms of advantage to him. Morgan 
is also about to devote his energies to investment, but his 
judgment is that he will profit something by exchanging 
the notes for $305,000 in gold. But again, the purchaser 
of the notes, instead of paying Morgan $305,000 in gold, 
hands to him his check for that amount, which is accepted. 
It is quite clear that this was done because the one making 
the purchase thought it to his advantage, while Morgan 
valued the check quite as highly for the purpose of ex- 
change as he did the gold. 

Basis of the credit judgment. — We now pass to the con- 
sideration of the basis of credit — i. e., the elements in it 
which cause credit funds to be valued more highly than 
money and consequently to supplant money exchange. 
Morgan's judgment is that the promise of Gates to pay 
$300,000 with interest at 5 per cent is more desirable than 
his own business as a broker. But why? Before an ex- 
change can take place the conclusion must be reached; but 
by what process? 

Ability to obtain money for future delivery. — The thing 
to be considered is a contract for future delivery of money. 
The promise is that Gates will pay $330,000 in gold at a 



CREDIT FUNDS 39 

definitely appointed time. In estimating the value of such 
promises, what element must be taken into account? In 
the first place, Morgan must estimate the ability of Gates 
to obtain that amount of gold at the time proposed. He 
sells his business; he receives a claim against the future 
income of Gates ; he must, in estimating the ability of 
Gates, therefore, consider his facilities for obtaining money. 
But this is not all. There is a second consideration. 

Business integrity. — Morgan must not only pass judg- 
ment on Gates' ability, but he must also take into account 
Gates's disposition to apply the money obtained to the 
fulfilment of his promise — to the payment of the claim 
when due. These two judgments lie at the basis of all 
credit; on these two elements does the value of credit rest. 
(1) A judgment that the one promising is able to fulfil his 
promise. (2) A judgment that he will be willing. Will- 
ingness is another name for ' ' honesty " or " integrity. ' ' 

The result of a favorable judgment — Confidence. — If 
these two judgments are favorable, or, as the business man 
would put it, if Morgan has ' ' confidence ' ' in the future de- 
livery, he is in a position to make a business estimate as 
to the present value of a future income of $330,000. Con- 
fidence is nothing more or less than the result of judgment 
that a person is both able and willing to do what he 
promises. 

Security. — That which we call security is a contract 
whereby a favorable judgment is secured when otherwise 
such judgment would be lacking. In the transaction in 
which Morgan sells Gates 's notes, the purchaser of the notes 
was not well acquainted with Gates, and was not in a posi- 
tion to pass favorable judgment; he did not value Gates's 
ability and integrity as highly as did Morgan. The pur- 
chaser of the notes, perhaps, would not offer more than 
$250,000 for them, but he knew Morgan and had confidence 
that he would meet his credit obligations.* He was willing 



40 FUNDS AND THEIR USES 

to buy Morgan's contract for future delivery of $330,000, at 
the times specified in the notes from Gates to Morgan, for 
$305,000. He therefore proposes that he will pay $305,000 
for the notes, on condition that they be "indorsed" by 
Morgan. What was the force of this indorsement? "Why 
did the simple fact of Morgan's name written across the 
backs of the notes raise the purchaser's valuation to such 
an extent that he was willing to add $55,000 to his offer? 
By operation of commercial usage (law) the addition of 
Morgan 's name set up a new contract. If this contract had 
been written out in full it would have been as follows : 

In case Gates does not pay this note when due, upon notice given 
to me, I hereby promise to pay it in full myself. 

[Signed] Morgan. 

Relation of security to credit. — This contract is one of 
the obligations known as personal security. Now the pur- 
chaser has confidence that the several amounts promised by 
Gates will be paid at the time specified, and he offers Mor- 
gan $305,000 for them. The effect of security is to obtain 
a more favorable estimate as to the value of the contracts 
for the future delivery of money which Morgan offered for 
sale ; it increased the price obtainable from the credit and 
decreased the cost of the money or other things received 
by Morgan in exchange for credit. 

Credit Viewed as a "Short Sale" of Money 

A short sale of flour. — No better illustration of a credit 
transaction may be found than what is known as a "short 
sale" — the sale of something that one does not possess. 
Pillsbury & Co. are millers. They enter into a contract for 
the delivery of 10,000 barrels of *A* flour to Kimball & 
Co., of Liverpool, at any time that Kimball & Co. may 
want it, after May 1, at $8 per barrel. Their business 
manager has made a sale of something that they do not 



CREDIT FUNDS 41 

possess — something that they are ''short" of. They have 
neither wheat nor flour. The company has only a mill and 
other equipment for making the kind of flour sold. The 
contract for future delivery, however, is important to the 
successful management of the mill. By this, one factor in 
the manager's problem is solved — the price which he will 
receive for his output. From business experience he is 
able to calculate another factor with substantial accuracy, 
viz., the cost of manufacture. If, therefore, the manager 
can make a contract which will fix the cost of the wheat 
to be used in the manufacture of the flour, he can calculate 
the profits as well as if he had sold flour already produced. 

A short sale of wheat. — Wheat was selling at 99 cents 
per bushel at the time that the "short sale" of flour was 
made. If, the company's manager calculates, "No. 2 Hard 
Spring" wheat may be had at $1 per bushel, his company 
will make a profit of $2 per barrel on the Liverpool con- 
tract. To assure his company of this, he enters into an- 
other contract with Brown & Schaffer, produce-brokers, for 
the future delivery of 50,000 bushels "No. 2 Hard Spring" 
wheat "on call" after thirty days, at $1 per bushel. But 
Brown & Schaffer have no wheat at the time the sale is 
made. They are "short" of the commodity contracted for, 
but, being a reliable business concern, Pillsbury & Co. make 
a part payment, or "put up a margin," and rely on Brown 
& Schaffer for the delivery of the grain. The manager 
can now devote himself to the manufacture of flour with- 
out being troubled about fluctuations in the price of wheat ; 
he has shifted the risk of market fluctuations in the price 
of wheat to Brown & Schaffer. Pillsbury & Co. have made 
a l ' short sale ' ' of flour, and to cover the risk of fluctuating 
price they enter into a contract for the future delivery of 
wheat. 

Settlement of the short sale of wheat. — Brown & 
Schaffer sold "short" of "No. 2 Hard Spring" wheat at 



42 FUNJDS AND THEIR USES 

$1 per bushel for delivery on demand after thirty days. 
They did this because in their judgment wheat was "going 
down"; they wished to buy on a better market to fulfil 
their engagement with Pillsbury & Co. Instead of going 
down, however, a "corner" is formed in this grade of 
wheat and the price advances rapidly. Thirty days hence 
Pillsbury & Co. "call" for the delivery of 25,000 bushels. 
Nothing will satisfy the contract under which the call is 
made but "No. 2 Hard Spring"; this is the grade needed 
for the milling process for the production of the kind of 
flour sold to Kimball & Co. ; this is the only kind that will 
be received. Whatever the sacrifice to be made by Brown 
& Schaffer, there is for them no alternative other than to 
deliver the exact thing promised, or to "settle" — i. e., to 
turn over to Pillsbury & Co. $12,500, to pay the difference 
between the contract price and the market price, which on 
that day 'happens to be $1.50 per bushel. In other words, 
before Pillsbury & Co. will agree to "settle," Brown & 
Schaffer must place the mill company in a position to buy 
$1.50 wheat at a cost, to them, of only $1. 

A short sale of money. — The Pillsbury company, how- 
ever, have not the extra $25,000 with which to pay for the 
wheat needed. The manager therefore takes the $12,500 
received from Brown & Schaffer and goes to Armour & Co., 
whose elevator bins are filled with "No. 2 Hard Spring," 
which they are holding at $1.50 per bushel; he arranges to 
purchase 25,000 bushels at $1.50, paying down $12,500 
(the amount received from Brown & Schaffer), giving his 
firm's note for $25,000 (principal) and $500 (interest), 
due in ninety days in payment for the balance. The wheat 
is immediately delivered. Pillsbury & Co. have purchased 
25,000 bushels of the kind of wheat desired. They have 
become the absolute owners of it; they may grind it and 
dispose of it as they please. But how has the wheat been 
paid for? In exchange, the company, in part considera- 



CREDIT FUNDS 43 

tion, has sold its contract for the delivery of $25,000 "on 
call ' ' after ninety days ; it has made a ' ' short sale ' ' of 
money — has again promised to deliver something that it 
was "short" of at the time the contract was made, hoping 
to obtain the money from Kimball & Co., of Liverpool, in 
return for the flour, before the maturity of the note. Thus, 
the calculation is, the return on the contract for the short 
sale of flour will cancel the contract for the short sale of 
money, and the Pillsbury company will have the difference 
between the two contracts as profit. 

Rules of settlement the same as in case of short sale 
of wheat. — The same rules, identically, apply to the credit 
contract of short sale of money as applied to the short sales 
of flour and of wheat. Nothing will satisfy the credit con- 
tract but the delivery of the thing promised. Pillsbury 's 
manager makes a similar contract on the purchase of the 
remaining 25,000 bushels of wheat due from Brown & 
Schaffer ; he grinds his flour and delivers it to the Liver- 
pool merchants in time to meet the short sale of flour to 
them. But Kimball & Co. fail to make return in money on 
the shipment; after the delivery of the flour Kimball & Co. 
become bankrupt. Nevertheless Pillsbury & Co. must meet 
their "short sale" of money — their two notes for $25,000 
each to Armour & Co. on demand after ninety days. This 
must be done even though it requires the sacrifice of work- 
ing capital, credit accounts, treasury' securities, even the 
milling plant and business reputation of the company. All 
must be sold, if needs be, to procure the money for delivery 
under the contracts to Armour. Nothing but money will 
satisfy the contracts. If the notes be for the delivery of 
' ' gold coin of the United States, of present weight and fine- 
ness, ' ' then gold coin of this description must be delivered, 
or a "settlement" made — a new contract entered into for 
the delivery of something else which Armour & Co. will 
take in lieu of gold. Greenbacks may be offered instead, 



44 FUNDS AND THEIR USES 

and accepted ; Pillsbury 's check may be taken as readily, 
if Armour believes he can get the amount of gold con- 
tracted for in exchange for the check. If Pillsbury & Co. 
can not get greenbacks, or if they have not a bank account, 
then they may offer to Armour some real estate in St. Paul, 
and this may be taken "in settlement" of the short sale. 
On the other hand, unless something else will be taken "in 
settlement" by Armour & Co., there is no alternative. 
Pillsbury must get the gold or be declared bankrupt. 

A corner on money — Financial distress. — In a period 
of great financial distress — in other words, at a time when 
demands for delivery of money on credit contracts are 
large — the price of money may be forced up; all kinds of 
property may command a low price in exchange for money. 
As in case of the corner on wheat, those who have sold 
" short" of money may have to pay any price necessary 
to obtain the thing contracted for, or for such other 
"funds" as will be received in place of money by way of 
"settlement." When demand is made for payment, money 
may cost two or three times as much as at the time the 
contract for future delivery is entered into. Failure to 
meet these contracts means bankruptcy — the sacrifice of all 
forms of property on the altar of "short sales" in credit. 
Bankruptcy is, in effect, a means of judicial "settlement" 
of short sales of money in cases where the parties to the 
contract can not come to a new agreement or ' ' settlement ' ' 
among themselves. 

Financial Uses of Credit 

In its relation to finance, credit has two uses : (1) It may 
be used as a means of obtaining funds. (2) It may itself 
be used as "funds." The second use is the subject of 
present consideration. Very often it happens that a mer- 
chant will take his note to the bank for discount. In this 



CREDIT FUNDS 



45 



case the transaction is one of exchanging a form of credit 
created for the purpose of obtaining "funds" (a note) 
for another form of credit which is created for the purpose 
of being used as "funds" (a bank account). 



Forms of Credit Used as "Funds" — Bank Credit 

Bank credit is a form of contract for the future delivery 
of money, especially created to serve the business com- 
munity as "current funds." The capital of the bank is 
in the form of a "money fund." This stock of money is 
held in reserve — is used to support its credit. The whole 
equipment of a bank is directed toward this end, and its 
success or failure depends on maintaining its credit cur- 
rency. The obligation of the bank is to pay money on 
demand. It must always keep in stock a "money fund" 
sufficient to meet the demands of creditors for delivery of 
money under these contracts. The larger its money fund 
the greater the amount of credit currency it can safely 
sell to its customers. About 50 per cent of the funds of 




F IG# 3. — Note of First Bank of United States. 

a well-organized business community are in the form of 
bank credit ; about 90 per cent of the exchanges of such a 
community are made for bank credit in one form or 
another. 



46 



FUNDS AND THEIR USES 



Bank-notes. — There are several forms of contracts for 
the delivery of money which are sold by a bank for use in a 
community as funds. One of the most common is the 
"bank-note." The bank-note is a written promise of the 





----^ 



J/&WS//S/A 






tqjinlibclvbl 



A,^«~-vs -'v. -.- .v. . ,.:^ 




WZfrS 




Fig. 4. — Note of Second Bank of United States. 

bank to deliver or "pay" the amount of money named on 
its face to the one presenting it at its counter. Fig. 3, on 
page 45, is a photo-copy of a ten-dollar-note issued by the 




. W///W 




Fig. 5. — Note of Southern Bank of Kentucky. 

First Bank of the United States in 1796. This form of note 
is known as a "Willing Note," taking its name from Mr. 
Thomas Willing, the president of the bank. The second 
reproduction is known as a "Biddle Note." It was issued 



CREDIT FUNDS 



47 



by the second Bank of the United States in 1829. In most 
countries bank-notes may be issued only in conformity with 
certain legal regulations and under such guarantees of 




Fig. 6. — Note of Exchange Bank of St. Louis. 

government as to cause them to pass from hand to hand as 
"money." Until about the middle of the last century this 
was the most usual form of ' ' bank-credit ' ' used by busi- 
ness men. In exchange for notes, bills, accounts, etc., 




Fig. 7. — Note of Tioga County Bank. 



offered to the bank for sale by customers, it would give 
out its own notes. At the present time, however, the most 
common form of bank credit is the bank-account — a credit 



48 FUNDS AND THEIR USES 

fund represented on the books against which the person 
owning it may draw checks in any amount desired. The 
"notes" of the bank are purchased by its customers, be- 
cause they may be passed from hand to hand in the com- 
munity as current funds. They are considered as good as 
money because the community believes the bank issuing 
them to be so conducted that it can at all times deliver the 
money contracted for if demand be made, and, being more 
convenient to carry about than gold and silver, the notes 
are preferred. The bank-account adds to this convenience 
that of allowing the business man to draw for the exact 
amount needed. In the early half of the last century there 
were many abuses of public confidence on the part of banks. 
Each State had its own peculiar laws, and many projects 
were devised which flooded the country with bank-notes 
that proved worthless. This caused the Federal Govern- 
ment to pass stringent laws regulating issues and deposits. 
In the United States, at present, "national banks" alone 
issue notes. These notes are also called ' l circulation. ' ' 

Bank accounts — Deposits. — A bank-credit "account," 
sometimes called a deposit, is in reality not a deposit in 
any sense of the word. The customer of the bank takes to 
it money and "checks" (or other promises and orders to 
pay money) which are owned by him and sells them; he 
exchanges these for an "open account" at the bank. The 
customer desires a credit at the bank because it will serve 
him better than any other form of current funds. The 
exchange takes place by reason of the fact that each gains 
a business advantage by so doing. The bank can use the 
money and checks purchased ("deposited") to greater 
advantage than can the customer, while the customer can 
use the current credit of the bank to better purpose in his 
business than can the bank itself. 

Emergency currency. — It sometimes happens that the 
banks are reduced to a condition in which their money re- 



CREDIT FUNDS 49 

serves are threatened, and with this their contracts for 
delivery of money — i. e., their outstanding credit. Various 
temporary expedients are at such times resorted to, such 
as the creation of credit instruments that will be received 
in "settlement" in lieu of money, but which are not con- 
tracts for the immediate payment (or delivery) of money 
over the counters. For example, during the financial crisis 
of 1893 the Marine Bank of Buffalo issued to its employees 
a form of certified check for payment of wages and sal- 
aries ; instead of giving > them money in payment of credit 
accounts, they issued a new contract for future delivery of 
money, which the owner or borrower could pass in the 
community, in settlement of his own credit obligations, 
until the bank should be able to take up these checks with- 
out impairing its reserve. Likewise, the South Chatta- 
nooga Savings-Bank, not having money to deliver, on de- 
mand, to those wishing to withdraw, in August of that 
year issued a new contract for the delivery of "current 



THIS IS TO CERTIFY, THAT THERE HA8 BEEN DEPOSITED IN THIS BANK FIVE DOLLARS, PAYABLE TO THE 
BEARER OF THIS CERTIFICATE, IN CURRENT FUNDS FOUR MONTHS FROM DATE. 

Chattanooga, tenn. Aug. 19, 1893. SOUTH CHATTANOOGA SAVINGS BANK. 



&**** 



By.. 



THIS CERTIFICATE WILL BE RECEIVED ON DEPOSITf« T» 0F ANY DEBT 0R OBLIGATION TO THE 

FIRST NATIONAL BANK, ^v ^ ^CITIZENS BANK & TRUST CO., 
THIRD NATIONAL BANK, ^ *"^ .(jjjWIEHL, PROBASCO & CO., 
CHATTANOOGA NATIONAL BANK '^&&& CHATTANOOGA SAVINGS BANK, 
SOUTH CHATTANOOGA SAVINGS BANK. 

This certificate is secured by the deposit of approved securities in the hands of T. G. MONTAGUE, 
President First National bank, as custodian to double the amount all 6uch certificates. 



MANAGER, 

Chattanooga clearing house association. 



Fig. 8. — Clearing House Certificate — Small Denomination. 

funds" four months hence, a copy of which is given on 
page 49. This form of currency temporarily answered as 
funds to those receiving it, and the certificates were taken 
in "settlement" of the contract of the bank entered into 



50 



FUNDS AND THEIR USES 



at the time the deposit was made. During the financial 
strain or "panic" in 1893, the enforcement of contracts 
for delivery of money would have caused the banks of New 



u 

£ 

O 

•o 
s 
a 
«) 

3 
O 

J= 
H 



e 



No. OOOO 



$20,000. 



Loan Committee of the New York Clearing House Association. 

New York, 



1893. 



This Certifies, that the. 



has deposited with this Committee, securities in accordance with the proceed- 
ings of a Meeting of the Association, held June 15th, 1893, upon which this 
Certificate is issued. This Certificate vnll be received in payment of balances 
at the Clearing House for the sum of TWENTY THOUSAND DOLLARS, 
from any Member of the Clearing House Association. 



On (he surrender of this Certificate by the 
depositing Bank above named, the Commit- 
tee will endorse the amount as a p^vment on 
the obligation of said Bank, held by them, 
and surrender a proportionate share of the 
collateral securities held therefor. 



$20,000. 



Fig. 9. — Clearing House Certificate — Large Denomination. 

York to sacrifice their entire assets to obtain the gold or 
other forms of "current funds." They had sold to their 
customers "demand credits," and needed "short-time" 




Tlfte President and Managers 

of the 

EASTO^aua>NlETLESP,AETlE 
Tim^PIKE COMPACT* 

promise to pay the bearer, on demand, at the Office 
of their Treasurer, in bills current in Eetjnsylvania, 

Wilkesbarre, March 1st 1816. 




Fig. 10. — Turnpike Company Scrip. 



current funds with which to meet them. To tide over this 
emergency, clearing-house certificates were agreed upon, 
to be taken in settlement between each of the clearing-house 



CREDIT FUNDS 



51 



banks. Since they could use certificates of indebtedness of 
the clearing-house, collaterally secured by assets of the 
bank, this form of credit funds avoided the necessity of 
selling the assets to obtain gold for payment. 






W: ?<*.-/86%40A 



V 



$\nii?;. 



1- 



««<> 






"M .& 






'W ' Jv&^> ' 






Fig. 11. — Sutler Scrip Issued During Civil War. 

Emergency funds — Commercial. — Merchants and 
manufacturers may resort to the same kind of expedients 
during periods of financial stress as that above described 
with reference to issues by banks. They may "settle" 



P5PI 



®w 



' I! 



MH : -^ 







EQSSnf6So « 



-» demand, we Jel&ntdc fy-fcay. 



j is/* aetnamd, we ftiexmoa » flaw -anWaPil C*S«|i 

' - _Z ' '_hi w 



1^ I && 



' V- ■■■■ ■-'■ V! 

- . 



*$ ha 

i -rite' i<3 



k * ■ *■ ; 



<^>2- QrOcek ei lbuttent cwaitof '*/qgie#. 
Fort Deposit, July £# >^ A%^^^^^^^^'Z^yt^^^^f [^^^^^ 



Fig. 12. — Railroad Trading Scrip. 



their wages-accounts by means of "scrip," as it is called 
— i. e., pays a credit contract which is due with another con- 
tract for delivery of money or goods at a definite future 
time; and the various merchants or business men of the 



52 



FUNDS AND THEIR USES 



community, believing that the one issuing the ' ' scrip ' ' will 
be able to meet it after the financial strain is past, are will- 
ing 'to take it in payment for goods and the scrip passes 
current. Every period of financial strain or business de- 




f^V^T* TWENTY FKVK ('BXTS '/fcv„M ffc 

•/./■// ///,ff. 



J7Wt///t? //,//,,,>/ ///,fr ////,; ■//// , ////*/,/,-fr/v,/ r/t /A. ////,?':>/ f//rf,b< :-,r/'/ 
;//r>rr////'.x/// A///,///,/}///,/ 'f.Q^VOf <-/./->-/ ///,?,:>,///,/ /A Mr,,, ,/,/../>. .,{,;' 




Fig. 13. — Loan Scrip Used to Meet Payrolls. 

pression since the Revolutionary War had its scrip issues. 
After the War of 1812 there was great financial distress, 
during which time the country was virtually without me- 







Fig 14.— Scrip Issued by Canal Company — Note the Worn 

Condition. 

tallic currency. To meet this emergency business houses 
and concerns of every kind issued l ' shinplasters, ' ' as they 
were called. The first here exhibited is from an issue of 
the Old Easton & Wilkes Barre Turnpike Company. From 



CREDIT FUNDS 



53 



1837- '41 the issues of private concerns were almost the 
only currency in use. The scrip of the Camden & Wood- 
bury Transportation Company and that of the Chesapeake 
& Ohio Canal Company are good illustrations of the form 





John H»rlm«n. Wm. .tJ-no.iH 
~ B. McKinney. 



THE MJUH 




Will p„ y the tharer, Twelve and a Half Vents, at the 

counter of either member of the Association, or at the Office of 

Mobile, in Stale Bank Notes, when 
the amount of Fiee DoU-ars is presented. 

Marion, ■ Alabama, jja,') 

: Treas'r. 



. Frt A'U 



Fig. 15. — Shilling Scrip Issued by Change Association 
Meet Scarcity of Coin. 



to 



of funds in current use by transportation concerns of the 
time. The demand for " change' ' at this time finds illus- 
tration in the issues of the Marion Change Association of 



^sbebssbhksbkess?: *: * " : " : ! " :■:•:*: *:- :ss %^ = ~ 





• V -'«Hte*fci..: ^ 







£ 







Fig. 16.— Fifty-cent Bank-Note. 



Marion, Ala. Being without money or means of carrying 
on transactions with their customers, the leading business 
men of the place, whose names appear at the top of the bill, 
organized for mutual accommodation. Certificates of de- 



54 



FUNDS AND THEIR USES 




posits of sav- 
ings - banks 
were also put 
into use as 
money in de- 
nominations 
to suit the 
convenience 
of customers. 
Another form 
of currency is 
what is known 
as a dividend 
warrant. It is 
intended to 
serve as funds 
without put- 
ting the con- 
cern to the 
necessity of 
raising funds 
to pay divi- 
dends. Gen- 
erally speak- 
ing, it is a 
dangerous ex- 
pedient, and 
indicates 
financial 
weakness in 
the company 
using it. The 
dividend war- 
rant is some- 
times used as 



CREDIT FUNDS 



55 



a means of making sales of property which a company 
may have on the market. The dividend or income warrant 
here exhibited is of this sort. 

Public emergency currency.— Various departments of 
the Government may at times find themselves under tem- 
porary financial disability — may not be able to meet out- 
standing credit demands or procure funds for necessary 
purchases. Instead of making the sacrifices necessary to 
procure gold or other current funds demanded, new con- 
tracts for the future delivery of money may be sold or ex- 
changed for old ones already matured. A copy of a certifi- 
cate of indebtedness or obligation of the town of Fayette- 
ville, Ark., as issued in 1842, is here exhibited. Nearly all 




Xo. 





STfte Corporation of the JToton of iPaoettebftle 

at t4e 5/Ua*am 'a Offat '« ^wfewiSt, firvM/J/e en <z4%£an<xu (Sjan-i Jfttci, 
wu&rh the 4ttm Of <S'i>iMi Q&o{&az6 £6 fLzej&ntad. 




Fig. 18. — Town Scrip — Issued to Meet Current Expenses. 



the States and local divisions of States were at that time 
bankrupt from having undertaken public improvements in 
the form of canals, railroads, and turnpikes. These notes 
were paid out to officers and others having credit claims 
against the towns, and were circulated in the community 
in the same way as are national bank-notes to-day. The 
scrip of the town of Port Deposit issued during the depres- 
sion of 1857, and that issued by the same town in 1862, 
when the levies of war had depleted local funds, are good 
examples of the emergency currency issued by towns at a 



56 



FUNDS AND THEIR USES 



later time. After the catastrophe at Johnstown, Pa., a 
similar financial method was resorted to. Bond certificates 
in convenient denominations, to the amount of $20,000, 
were put into circulation as a means of meeting current 
necessity. In 1893 the city of Richmond issued a 6-per- 
cent bond certificate of similar character. The "war- 
rants" of counties and school districts find like employ- 
ment. The one- and two-year "interest notes" issued by 
the National Government during the civil war were 
"emergency currency" for the use of the Federal Govern- 
ment. They were contracts for the delivery of money 
one or two years from date given, in settlement for credit 
claims due, and on which demand for payment had been 







E03EOT MEE0S1T IA>jm, 

«,„/ ,M.-,„x„f//,f /:„„■.,„/, .„ i'.» */,.»». TWENTY' ftVE CERTS 



w»htY itf rri ,r« 



' : *'' " "'=■'■' -■•^fn,vd\\l/,^/rl t ,,,/UY,/^l.uy,,,uhi/Hr,iU>',tr.!mMti/,,/. 



,. - . k. .>. - tfn/,,m<M 







Fig. 19. — Town Loan Certificate, Issued in Panic of 1857. 



made. The United States note or "greenback" was origi- 
nally a species of emergency currency in the nature of a 
contract for the delivery of gold or silver coin "on de- 
mand." It was understood, however, at the time of issue, 
that the demand would not be met until the Government 
had the necessary gold and silver in the Treasury with 
which to meet it. The result was that the notes did not 
pass ' ' at par ' ' with gold or silver, but were received at a 
discount proportionate to the estimates of value based upon 
them by those receiving these promises. 



CREDIT FUNDS 



57 



Commercial Credit Funds 

Commercial credit or contracts for the future delivery 
of money are frequently given and received in transactions 
with merchants, as between those using them they answer 
every purpose as "funds." The practice allows merchants 
to make sales and customers to make purchases. Under 
such credit arrangements a customer may order goods of 
a house ' ' on credit ' ' and make ' ' settlement ' ' for the credit 
at a future time. The promise to pay is unwritten ; it may 
be made by tacit understanding. Some memorandum of 
the transaction is usually taken at the time, although it 
may be left entirely to the memory of the parties without 










z &J^f££^3S£ fa/'-//'' 




Fig. 20. — Same, Showing Small Denomination Demanded fob 

Change. 



any form of entry. A large part of the mercantile busi- 
ness of the country is conducted in this way. When one 
opens an account at a store he may make definite arrange- 
ments to have all purchases "charged" — that is, entered 
on the books — statements to be made and settled on the 
first of each month. When the customer is well known, 
however, and his ability to pay is undoubted by the mer- 
chant, he may order goods without any previous arrange- 
ment. In this case it will be tacitly understood that the 
purchaser of goods will pay the account when demand is 



58 FUNDS AND THEIR USES 

made. One may go to a grocer and say, "Please send out 
a barrel of No. 2 Pearl flour." The merchant will deliver 
the flour and charge the price to purchaser's account on 
his books. The contract for payment is just as well under- 
stood as if a definite formal arrangement had been made. 
A manufacturer usually has many such arrangements with 
laborers, material men, and business houses with which he 
deals. So a retail merchant will deal on similar funding 
arrangements with wholesalers, and wholesalers with pro- 
ducers. This form of credit is not transferable except by 
special agreement, and can not pass current in the com- 
munity. It answers as funds only to the one with whom 
the contract for future delivery is made. 

Current credits. — In all lines of mercantile business ' ' the 
books" will show a large number of current credits — that 
is, the regular customers will have an understanding that 
all orders will be honored to a certain amount, settlements 
to be made at stated intervals. The goods purchased in 
this way become the property of purchasers as absolutely 
as if money had been paid for them. Goods are exchanged 
for credit on open account. The merchant has a right to 
enforce the collection of the claim in the same manner as 
if a promissory note had been given. 

Mutual credit. — It often happens that two merchants, or 
a manufacturer and a merchant, may each wish to run an 
account with the other. In this case each will make entry 
of goods purchased, and at the end of the month or year 
settlement will be made by exchange of statements of ac- 
count and the payment of the balance due. 

BIBLIOGRAPHY 

Taussig, F. W., Principles, Vol. I, Book III, Chapters xxiii 
to xxv. 

Westerfield, R. B., Banking Principles and Practice, Chap- 
ter v. (Ronald Press, New York, 1921.) 

White, Horace, Money and Banking, Book III, Chapter i. 



CHAPTER IV 

INSTRUMENTS OF TRANSFER OF CREDIT FUNDS 

Every purchase and sale involves an exchange in pos- 
session and ownership. Money funds when used in ex- 
change are passed from hand to hand. Many forms of 
credit funds, however, do not admit this method of trans- 
fer. For the purpose of making transfer of credit funds, 
several classes of instruments have come into vogue, each 
adapted to some special use or to the transfer of some spe- 
cial form of credit funds. 

The customer's check. — The most common form of in- 
strument used for the transfer of credit funds is the 
1 ' customer 's check. ' ' A $10,000 credit account is purchased 
at a bank by a customer for the purpose of making cur- 
rent purchases and payments. He then buys a stock of 
goods for $1,000. In exchange for the gOQds the customer 
of the bank transfers $1,000 of his credit account to the 
one from whom the goods were purchased. To do this he 
draws his check for the amount. 

Form and significance of a "customer's check." — A 
1 ' customer 's check " is a sight draft on a bank for the pay- 
ment of the amount of money stated therein, to a third per- 
son, "on account" of the maker. It differs from ordinary 
commercial drafts in that it is drawn against an account 
purchased of a banker for the very purpose of drawing 
against it; the bank is therefore bound to honor the check 
when presented. The check need not be in any prescribed 
form; it may be written on a blank sheet of paper, with a 
pencil or entered on the printed form of a blank. It is for 

the sake of convenience and uniformity that banks provide 

59 



60 



FUNDS AND THEIR USES 



blank checks for the customers. These blanks are usually 
bound and given out to the regular customers of the bank 
in book form. Each check usually has a "stub, " or short 
end, which is left in this book after the check itself has been 



« 



Pulaski City.Va.. 



l OlMH!faHOmi^^HK 



T 



wT° THE 

pA ORDER OF_ 



Of PULASKI CITV.' 



_B0LLARS 



tiOjT&ifuAih 



Fig. 21. — Usual Form, Country Bank Check. 

torn out, on which memoranda may be entered for the con- 
venience of the customer — it assists him in keeping a rec- 
ord of the transfers made by him, and of the amount of 
such credit fund still remaining at the bank against which 
checks may be drawn. 

How to make out a "customer's check." — As before 
stated, no particular form is necessary, and a lead-pencil 
will serve as well as ink. The bona- fide intention of the 
one having the right to "draw" is all that it is necessary 
for the bank to know. But certain rules should be followed 
as a matter of convenience to the bank and precaution to 
the drawer. In writing and signing checks good black ink 
should be used. 

Date of check. — Checks should be dated, but the absence 
of the date does not warrant a bank refusing to cash them. 
While a note executed on Sunday is not good in many 
jurisdictions, a check so dated is valid. A post-dated check 
does not make the bank liable for payment if presented 
before the date entered. A check should never be issued 
under an arrangement with the holder that it will not be 



TRANSFER OF CREDIT FUNDS 61 

presented until a subsequent date, named on the face of 
the instrument. Such practice often leads to complications 
in business relations which hurt the credit of the maker 
and put the bank to endless trouble. 

Filling in the amount. — A check may be drawn for any 
amount, so long as it does not exceed the "credit fund" 
of the one drawing. In the office of the Pacific Mills, Bos- 
ton, may be seen the canceled check of the United States 
for one cent; on the walls of the Bank of Commerce, New 
York, is a check for $14,000,000, signed by the banking- 
house of Kidder, Peabody & Co. In this appears one of 
the great economies of the use of bank credit. It is just 
as easy to transfer $14,000,000 in form of credit funds at 
the bank as it is to transfer one cent. In writing in the 
amount, the drawer should begin at the extreme left of 
the line. The illustration here given is a copy of a check 
drawn by Andrew Jackson on the Second Bank of the 
United States, for one dollar. It is an excellent example 



Pi I °5 h* 



JVb. Philadelphia, SS-U <- -<?^__ 1&J/' 

BANK OF TH£>s1h£^ UNITED STATES, 





"> 



PAY to d&z0s^ c _AQ € «^£&& irz .a* K <»• Hearts 
(J^2'^T-^i Dollars 



100 



Dollars^) 



^s^^^^S^^lvv^^^^^^^XsS 



Fig. 22. — Check on Second Bank of the United States Drawn 
by President Jackson. 



of a poorly written check, and one which could be very 
easily "raised." One receiving such a check might write 
"one hundred" before the word "one" and "10" before 
the figure "1," and in this way raise the check from $1 to 



62 FUNDS AND THEIR USES 

$101. If this were done, and the bank cashed the check, 
the bank would not be responsible for the loss. The drawer 
would be held responsible for his own carelessness. This 
method of raising checks is the one most common in bank- 
ing experience. It is wise to begin the writing at the left- 
hand margin, or draw a running line 

before as well as after the written words, thus preventing 
any additional writing. The check here exhibited, drawn 
by Daniel Webster on the Boston branch of the Bank of 
the United States, is a carefully drawn instrument. When 



j§§§p- Office of Discount and Deposit of the Bank of the United States. 

>'t?&» It fP'is 't.fr. 



V«t%MMVM^tfm«WM% 




or JScam*, 

Dollars rod 



Fig.' 23. — Check Drawn by Daniel Webster for $750.00 on the 

Office of Discount and Deposit of the Old Second 

Bank of the United States. 



checks in which the figures in the margin do not correspond 
with the amounts stated in the body of the checks are pre- 
sented to banks for payment, the courts have decided that 
the amount stated in writing shall be considered correct. 
The usual practise, however, is for the paying teller to 
withhold payment until he may satisfy himself as to the 
intention of the maker of the check. 

Entering the name of the payee. — It is not necessary to 
enter the name of the one to whom the credit funds are to 
be transferred. If a check is drawn ' ' Pay to Bearer, ' ' any 
person that is the bearer can collect it and no name need 
be inserted. The name of a definite payee may be inserted, 
as, for example, ' ' Pay to Leonidas Smith. ' ' Usually, how- 



TRANSFER OF CREDIT FUNDS 63 

ever, cheeks are drawn to some person "or order." The 
phrase "Pay to the order of Leonidas Smith" signifies that 
the amount is to be transferred or delivered to Leonidas 
Smith, or to any person to whom he orders it paid. 

Checks should be numbered. — It is customary to num- 
ber checks consecutively in the check-book so that each one 
can be accounted for. The numbers are inserted for the 
convenience of the customer, and not for the convenience 
of the bank. The checks (or "vouchers," as they are called 
after they have been paid) when returned may thus easily 
be compared with the "stubs" of the check-book, or pasted 
back into the book and filed for easy reference. 

The "check-book." — A check-book is a bound collection 
of blank orders for the transfer of bank credit. The ad- 
vantage of binding is that the "stubs" may be kept for 
reference. By reference to the memoranda so kept the cus- 
tomer may at any time know what amount of funds 
remain subject to draft. A "bank book" is a memorandum 
book kept to show the other side of the customer 's account. 
At the end of each month it is often the practice to leave 
this at the bank that the amounts drawn may be entered 
and a balance struck. If the bookkeeper's balance is differ- 
ent from the customer's, this may be accounted for by 
checks drawn but not presented for payment. 1 There be- 
ing no mistake, the bookkeeper's balance, less checks out- 
standing, will equal the balance appearing on the stubs of 
the check-book. The unpaid checks may be presented at 
any time ; therefore the available balance of account is the 
amount shown by the "check-book." After the "bank- 
book" has been balanced, the paid checks are returned as 
"vouchers." 

Drawing check to oneself. — If one wishes to draw 

1 It is the growing custom to do away with the bank book, and for 
the customer to keep both his deposits and his drafts on the stubs 
of his check-book. Then the bank on request or monthly will give 
to the customer a copy of his account for comparison. 



64 



FUNDS AND THEIR USES 



money on his own account the check should be written 
"Pay to the order of Cash/' This is preferable to a check 
drawn to "Bearer." A check drawn to "Cash" will not 
be paid to any one but the drawer or his well-known repre- 
sentative, while a check payable to bearer, if lost, might 
be misused. A check written "Pay to the order of ... . 
[your own name] . . .," will necessitate an indorsement 
— i. e., one drawing to himself would be required to indorse 
his own check before he could get it cashed. 

Checks drawn to oneself for special purposes. — One 
wishing to draw a check to pay a note may make it pay- 
able "To the order of Bills Payable." One buying a draft 
may indicate this in proper language, as "Pay to the order 
of N. Y. Draft and Exchange." Any special personal use 
may be indicated on the face of the instrument. 

Checks drawn to others for special purposes. — Likewise, 
a check drawn to another may have the purpose or use of 



o4?/* 9t f. sM/fadtyiAw-j^ fj / 9 9 ft 



WHCN COUNTERSIGNED BY J H'WlLHEILM PAY/«STER 



S^pF ■ y &inr&n&*->£&. <*P l 'car 






»0T VALKf FOR * NY °-'<=r-"£> 

ONE HUNDRED andFIFTY DOLLARS 




•auArr as > 



f #flft/& 



Countersigned 




mZASuHEB 



Fig. 24. — Specially Designed Payroll Check of the 
Lehigh Valley E. R. Co. 



the funds transferred indicated on its face; as, for ex- 
ample, "Pay to the order of John Jones, for September 
rent." When the check has been returned, indorsed by 
John Jones and paid by the bank, it will answer the double 
purpose of "voucher" from the bank and of receipt of 



TRANSFER OF CREDIT FUNDS 65 

payment of "September rent." A settlement of wages 
may be made by check, marked "Pay Roll" or "Wages." 
When objection is made to this, it is best always to conform 
to the wishes of the bank — it is an unnecessary encum- 
brance of the paper which is intended to represent relations 
between customer and bank only. The transactions be- 
tween Jones and the bank's customer may be represented 



Wm 



UHbbAb.1 



{^Jgtjgfljpgjaf 




H 




Bfefasi 



@frwt£na?y^ 



Fig. 25. — Specially Marked Dividend Check fob Use of 

Customers. 

in some other way. A bank will make no objection to the 
matter on the f ace-of a check if it is printed or engraved, 
and has not to be written or inserted at the time it is 
drawn. The above form states the object for which the 
transfer is made. The large corporations of to-day have 
checks especially printed for nearly every account against 
which drafts are made. Other forms, quite as unobjection- 
able and more simple in style, have the purposes of their 
issue printed in red ink across the face, or engraved in 
some form. 

Safety devices in checks. — Many safety devices have 
been used to prevent the fraudulent alteration of checks. 
A customer may have an engraved check-form of his own, 
and will notify his bank that it may honor those only which 
are drawn on this prescribed form. But even then the 
prescribed blanks may get into the hands of those who 



66 FUNDS AND THEIR USES 

would use them for purposes of fraud. As a means of pre- 
venting alteration and forgery, the amount may be punched 
or cut out of the paper. This safety device has been cir- 
cumvented by having the holes filled with paper pulp and 
new figures cut or punched to suit the purposes of swin- 



&\? J .., __* ^ .^w^t^M. ' j<$ 





a* 4*4 

5fc & ff 






Fig. 26. — Private Check Designed to Prevent Forgery. 

dlers. Some companies have their checks limited on their 
faces. The best device yet adopted, however, to prevent 
"raising" is that employed by the express companies and 



fflvtuiwct front, 

0%> Q&yi&ne c^^wz/^^4,^^^^ //tut. 

ff^tJbx, "M^ djjA. Ai*b**4uj«. *<* + *%•*> — • afcffa { . 

on awnt _ 



Fig. 27. — Receipt Used as a Check to Avoid Stamp Tax. 

the Post-Office Department. These will be explained later. 
Receipts used as checks. — A novel instrument, used by 
the banks to save their customers the expense of paying 
the stamp tax imposed by the Government to help defray 
the cost of the Spanish- American War, is given above. It 



TRANSFER OF CREDIT FUNDS 67 

is in form a receipt for funds transferred or withdrawn. 
The internal revenue law provided for a minimum tax of 
two cents on each check. Instead of presenting a check, 
the customer would sign a receipt, and the bank would 
thereupon make the payments or deliver the funds for 
which the receipt was drawn. This was in general use in 
many parts of the country for direct dealings of customers 
with banks. 

How to authorize others to draw on one's account. — 
It is sometimes a convenience in business to give to some 
one else the power to check against one's bank-account. 
This may be done by giving to another a power of attorney 
— i. e., the right or authority to be your attorney, to rep- 
resent you in the transfer of funds on your account at a 
bank. Authority of this kind must be in writing, unless 
the bank is willing to take the responsibility for oral au- 
thorization. Financial houses, as well as the United States 
Post-Office, issue printed blanks for use by those who wish 
to give to others the power to draw on their accounts or to 
sign money-orders. A power of attorney from Daniel Web- 
ster to Mrs. Webster, giving her authority to draw and sign 
checks, is represented on page 68. This was first repro- 
duced in Rhodes 's Journal of Banking; it was taken from 
the files of the bank where it was used by Mrs. Webster. 

The crossed check. — The "crossed check" is a form of 
customer's check not commonly found in America. In 
England, however, it is in common use. It is an ordinary 
customer 's check that has across its face bars which signify 
that it must be presented for payment through some other 
banker. Such a check will not be cashed if presented by 
the payee himself to the bank against which it is drawn. 
The object of such a check is to have it first presented to a 
bank to whom the payee is known, and whose indorsement 
will be accepted as a guarantee of the credit of the maker. 
When a check is crossed "in bank" — that is, has two line^ 



68 FUNDS AND THEIR USES 

drawn across its face with "& Co.," inserted — it may be 
presented for payment to any bank other than the one on 



r 






-- - • — • — • III I" -~ I ll 

Fig. 28. — -Power of Attorney Drawn and Executed by Daniel 

Webster in Favor of His Wife, Authorizing Her to 

Draw Checks on His Account at the 

State Bank in Boston. 



which it is drawn; but when it is "specialized" — i.e., 
when it is crossed or has stamped across it the name of a 



TRANSFER OF CREDIT FUNDS 



69 



particular bank — it must first be presented to that bank 
for payment. A law has been enacted in England which 
prohibits the payment of a crossed check by a bank against 
which it is drawn until it has been presented through 
another bank. If the drawer of a check knows the payee's 
bank , he will usually "specialize" it; if his bank is un- 
known, the check is crossed ' ' in blank, ' ' and the bank pay- 
ing it is held for proper indorsement. The ' ' crossed check ' ' 






a 



//. £> 




Fig. 29. — English Form of Crossed Check. 



is a more secure form of negotiable instrument than the 
ordinary "customer's check. It is useless in the hands of 
the wrong person. We have reached practically the same 
end in this country by having stamped on checks intended 
for circulation as negotiable paper the words, "Payable 
only through. . . . Clearing-House when properly in- 
dorsed. ' ' 

The cheque-bank check. — The use of the "crossed 
check ' ' has given rise to an institution known as a " cheque- 
bank. " This form of bank sells to its customers a book of 
its checks, the amount for which each may be drawn being 
limited on the face of the check itself. For example : A 
book containing 50 blank checks, each of which may be 
drawn for the maximum amount of $10, may be purchased 



70 



FUNDS AND THEIR USES 



for $500. When the book is finally presented at the bank 
for settlement, the bank will return to the customer the 
canceled and paid checks; the difference between the 
amount of drafts actually made and the amount paid for 
the book will be returned to the customer, or credit will 
be given on the purchase of a new book. Check-books are 
made up of assorted blanks, to suit the customer's con- 
venience. Such books may be had at the main office, or at 
any of the other banks which serve as correspondents of 
the "cheque-bank." 

Other instruments of transfer of credit funds. — The 
"customer's check" is the instrument usually employed 
for the transfer of funds from one bank customer to another 
where business relations are such as to make them accept- 
able. It often happens, however, that a customer will find 
it desirable to have funds in a bank where he is not known, 
or will desire to make payment to one who does not care 
to take the risk of a private check. In such case some 
other form of instrument of transfer will be used. 




Fig. 30.— Usual Poem of Certified-Check. 

The "certified "check and the "cashier's check."— For 

this purpose one of the most common devices is the ''certi- 
fied check." The customer will draw his check for the 
amount desired, and this will be handed to the cashier 
of the bank in which he has funds. The cashier will there- 



TRANSFER OF CREDIT FUNDS 71 

foi?e write across the face, "Certified," or "Gtood when 
properly indorsed," over his official signature, and charge 
the same against the customer's account. This amounts to 
a transfer to the bank of the amount drawn, and a guar- 
antee on the part of the bank that the funds will be trans- 
ferred to the owner of the check on presentation. Another 
form is the "cashier's check." To obtain a cashier's check 
the customer will exchange his own check for that of the 



Mi *i ■ &<„„<,/%- VA 



A) y / 





■ S//U /'■ far "krr^y^ 



. / c//„,!J 



'S,^,;: 



Fig. 31. — Cashier's Check, Used in Place of Certified-Check. 

cashier — i.e., the amount of funds represented by the 
check will be formally turned over to* the bank, and the 
bank, through its cashier, will thereupon deliver its own 
instrument of transfer to the customer, made payable to 
such person as the customer may direct. Another form 
of instrument of transfer of credit funds used between 
banks is the bank draft. One of the most artistic engrav- 
ings of this kind is given on page 70 — a form of draft 
used by the "Biddle Bank" for business with its cor- 
respondents. 

The money-order is an instrument of transfer of funds 
created for a special purpose. For example : One wishes 
to send $50 to a person residing in another part of the 
country. He will make a deposit, or in some manner cre- 
ate a $50 fund in the hands of a company or department 
of Government whose business it is to transfer funds. The 



72 



FUNDS AND THEIR USES 



fund having been created, the company or department will 
issue an order for the amount, payable to the person speci- 
fied. This will be sent 
instead of money or 
other forms of funds. 
Money-orders are issued 
by express companies, 
the Bankers' Money- 
Order Association, and 
the Post-Office. A photo- 
engraved copy of an 
Adams Express Com- 
pany order is exhibited 
on page 73. 

The letter of credit. 
■ — One may wish to travel 
in a foreign land — let us 
assume the estimated 
cost to be $1,000. It may 
not be convenient or safe 
to carry money enough 
to pay the expenses of 
the entire trip. For this 
reason some form of 
credit is preferable to 
money. With this in 
view, the prospective 
traveler goes to his 
banker. He arranges at 
the bank for a special 
credit fund of $1,000 to 

Fig. 32.— Bank Draft— Bank of the be drawn against at any 
United States. . . _„ . , , 

time. But banks and 

' ' customer 's 




business houses abroad will not 
check ' ' against an American bank. 



accept a 

A "Letter of Credit "is 



TRANSFER OF CREDIT FUNDS 73 

therefore issued. The ordinary letter of credit is really a 
guarantee of payment of all ' ' customer 's checks ' ' or drafts 
drawn by the holder to the amount stated in the letter. It is a 
* ' certified-account " instead of a "certified-check." It has 
its advantages over a certified-check in that it allows the 
customer to draw just the amount needed at any time or 
place, and, upon identification, to have his check cashed in 
the same manner as a certified-check or a cashier's check. 
With the increase of foreign travel the letter of credit has 
become such a common instrument for the transfer of 
credit funds that every one should be familiar with its form 
and purpose. We reproduce on pages 74 and 75 a fac- 
simile of the first and second pages of a letter of credit for 
£100 ($500). The first page is the letter guaranteeing the 
account, authorizing the various correspondents of the bank 
issuing it, or any other banker to whom the letter may be 




29f>6 






Www cettwreftswsKrs^** author/. 

X AB/fccs toTftANsmr and - 



3fyesutyofjr: 






$ CS_ <>^^ _^A 




^. ^t£X Mnyerasure aaeraiton or myltlalum afous: order render* ti rWB(2&^ 



Fig. 33. — Express Money Order. 

presented, to pay to the holder any amount for which he 
may draw not to exceed the fund provided. In order that 
the fund may not be overdrawn, a second page is provided 
upon which are entered the amounts drawn. These entries 
are made by the bank officer himself at the time that the 
draft is paid, and give a complete account of the fund. 
The entries give the names of the banks to which the letter 



74 



FUNDS AND THEIR USES 



is presented, the place, and the amount paid by each. On 
the third page is the ' ' Indication List ' ' — i. e., the names 
of the bank's correspondents where drafts will be honored. 



i§^^§3^^^M^^SJSS^^t 







:*a- a 



// ri/iwwn 



% %yMu*., a^u /i^ j^ t i , jg 



1/ 



f^s^SSI^I 




/ / / - 



& | //■//////,,./,;/ :///'in/.>/, jtu/jf/rt/t<lpS\il^l&^,itfi/ ia/nr'.if it/,;/ '-//i, //</</<< </«/<■■ 
i I U)X\)C)XiU,,r/ <K,/f/*> U/kcM/y ,»M-t,/,<. ,/.«„;, <//.,/<./ 

'/,„/-. i,/,-//f\/i,,//>, l/iil/Y i,i, t /,,;'//. 
Vj'(/,\l,\J>J.aX^X. 3 6~~ / 4 2> * 

^' /zCA ■/,/■//,, i//A^/ir//>/ 



' //• /Jt//,ry,y/t//-Alf/,/r\/rc///> >//,,// >t>,,/ /////,. 

; f/l./f\//<-n(-)^im\J/')t,/,'/, //_ li, yyV/j/ab/ fkJt\ir{Jr'f*vCJiA~ *D 

SJ- ?/?*': /"'■>*$?>/'. '/<'/''^</ y>'///\br% -,/,i f . 

m I ■ >/> /tint n, */ tt <t„ /,,//„//, n;>//, / 1, ),///,,/< i, 

M | tic- :/«r/- *///„., /,//,} f ,y„S^&i/-rt, ' i/-n/i /, ,;,// ',,,.„ i ,,/i/r, ,. / 
§ 5 ,'//<„/,,», > ' ^M/> /,//// ,/^T/^/i//////// //,,//, //,,/,/,/,///////,/,/,/ 
S Z /< //,//,//////, „//,/i,i„i,. ■ . £j 
it' '- :'M, M , .>< ,&,///,„///, V tt 



c2\ 
y. //, ■■// 1 // "i./.jc >t//, :/ a ii// /// ■'//■■/,/ f///\-\(A iii/i/i )./■< //it ., 



%/<f /;■-/// //, 



tj&tz: 






/o 



• /("£ i (/.).) tr/t "/.-) ■ ' .__■ c*-i 

.'//,, //h,i//,,i.) i/ir/i/i'ritv/r/i //i, , 

//i/i/i/u/yr ,/ //i,,/j,'//,< -tjf l"l///l/: r><«^*« « 




' -' -'-^ ••-.-•- - : -\--. £^i 



Fig. 34. — Letter of Credit — Advice. 



The customer is not, in fact, limited to the correspondents 
of the bank issuing the letter, as the draft will be accepted 
at any place where the bank of issue will be given credit. 



TRANSFER OF CREDIT FUNDS 



75 



As a matter of safety and of greater ease in identification, 
the banker issuing the letter requires the one to whom it 
is issued to place his signature on the face of the letter 
itself. He also takes a number of other signatures on blanks 



ENDORSEMENTS ONCE MADE.h£ncon'. of mym 



I tOWW. -" f AMOUNT STCKtWa. W» ITTEN ~<M WORD 



■iS,*PR'. I9KPAI0 BT MORGAN,' UAWES & <£ PARIS 



: _8 MAY.fife BfiQWN, SHIPLEY ft CJ>. LONDON* ■ J J^££^„^ 9 /? K I : 



/~o~oT 



Fig. 35. — Letter of Credit — Endorsement. 

specially prepared for that purpose, and sends one to each 
of the leading foreign bankers drawn upon. In course of 
travel or business the holder presents his letter at one of 
the banks named on the "Indication List"; thereupon the 



V."". '■■ ' ■ 



~ ' i-'.^t ■ ' '■'■.",. 



1KJICU EOTtSft 



g£S3^> f) 49170 






fei^i^i^. 




C?&<%. c?Zyi.j{j 



Fig. 36. — Traveler's Check. 



cashier will ask him, in his presence, to sign a draft for 
the amount desired. After' comparing the signatures, the 
cashier will enter the amount of the draft on the second page 
of the letter, and return the letter with the money drawn 



76 



FUNDS AND THEIR USES 



to the payee. Payment is usually made upon the simple 
identification of comparison of signatures. Should the 
traveler lose his letter of credit, he will at once notify the 

banks upon 
and by whom 
it is drawn. 

The "trav- 
eler's check." 
— Another in- 
strument of 
transfer of 
credit funds 
for use in 
travel has been 
devised by the 
express com- 
panies. This is 
most extensive- 
ly used by the 
American Ex- 
press Com- 
pany which has 
offices all over 
Europe. Over 
10,000 agents 
are authorized 
to pay these 
checks. The 
ease with which 
they may be re- 
deemed causes 
them to be re- 
ceived by 
hotels, rail- 
Fig. 37. — Brown Brothers' Traveler's Check. roads, and busi- 




TRANSFER OF CREDIT FUNDS 



77 



ness houses about as readily as the money of the country. 
They are issued to the traveler in denominations of $10, $20, 
$50, $100, and $200, to suit the convenience of the purchaser. 
When issued, they are bound into a small check-book, and 
may be carried about as ordinary checks. Precaution 
against loss and for identification of the holder of a trav- 
eler's check is provided by having the purchaser sign his 
name in the upper left-hand corner at the time of issue. 
When the check is presented for payment he is again re- 
quired to sign his name on the lower left-hand corner. The 
signatures must agree. The success of the American Ex- 
press Company has led other foreign exchange houses to 




Fig. 38. — Endorsement and Identification of Payee. 



issue travelers' checks. A notable example is that issued 
by Brown Brothers. This house, with its international con- 
nections and long-standing reputation for honorable deal- 
ing, has an established credit which will be taken in trade 
anywhere in the commercial world. Its checks have the 
advantage of being more difficult to forge. Instead of 
having both signatures of the customer written on the face 



78 FUNDS AND THEIR USES 

of the instrument, where one will serve as a copy for the 
other, the one selling the check to a foreign house must in- 
dorse his signature on the back. The cashier may then fold 
the paper in such a manner that the writing may be com- 
pared, as shown in the accompanying cut. It will be noted 
that on the face of the check is indicated its money equiva- 
lent, or exchange value, in each country where it may be 



ZjRAVJiLER\sciiEa{ % mn& 




oolasy 



OATS ... - iCm 

uouo H777//.V CLVB yEAJi/^'cmr/jiA73:\ - J ?*5 

* ^hrcuqh thei" Copr>esporic!er>ts* 

| fIFTJ£&o/ku?i or EQUIVALENT as /0//0H& f /P ' 

U. K l •-&r"l«MO»^,. v iSSaSA« > ^/api' , |{„ TI SERMAKY. "■ «gXSSSZ«M ' "OUAHO. ' AUSTRIA ) »Sa ({ <$M if .^VtS l . 

j M 50' - jlOj 4 : l 33125 20& 30 183; 49 H22! 55 >245: JO 90 ft*) . S** '*» f* 

i 1 1 — i • fn — - — — — • '•■ • ■ • ■■■ "'■ A* — <t\—~ ■ — - 1 

Coi/sifcrsifJ&qfc're \? •-» Y 

l j*?*^ ; ^^£»:?^ : ^: ,-^ ., - ■■ d 

Fig. 39. — Form of Traveler's Check Issued by Banking House, 



used. Another house prominent in international exchanges 
which has adopted this method of securing patronage from 
serving the foreign traveler is Knauth Nachod & Kuhne. 
It will be noticed by reference to the foregoing exhibit 
that their check is, in form, almost identical with that of 
the American Express Company. 

The interchangeable bank money-order. — As early as 
two decades ago the money-order business of the country 
had become enormous. As shown by the report of the 
Postmaster-General, the business done by the postal money- 
order department, in 1901, was $274,500,000, while the 
same class of business transacted by the express companies 



TRANSFER OF CREDIT FUNDS 79 

was estimated at $150,000,000 per year. With an aggre- 
gate of sales of money-orders amounting to $425,000,000 
per year ($1,400,000 per day), the popularity of the trav- 
eler's check suggested that by use of an interchangeable 
money-order the banks could handle a large part of a 
business which produces in fees about $3,300,000 per year. 
Mr. Percival Kiihne, of Knauth Nachod & Kuhne, was 
among the first to recognize this opportunity. Calling 
together the secretaries of the various State bankers' asso- 
ciations, a bankers' money-order association was organized 
with Mr. Kiihne as its president. The avowed object of the 
association is to compete for the enormous money-order 
business, by allowing every bank which becomes a member 
of the association to issue interchangeable certificates. The 
Western National Bank of New York acts as a clearing- ' 
house for the other members. In other words, the order is 
in the form of New York exchange which will be accepted 
anywhere in the country. The banks are in a position of 
advantage over the express companies, for the reason that 
the public is accustomed to dealing with the banks, and will 
find it an added convenience to purchase money-orders 
there. 



%BankrrsltmtPl)ililfrAs5iiriation. N? 

g3£32ji<3££t Th[ Amouh of t»ts ffloNtY Order * 

<°j§jSoO<5; cortoansmission aho payment e-. THE BANKERS! 

^K^S S>oo-|j! 

C 5 £ = ? * * t £ > I . 



1 



issue, 

I THE BANKERS MONEY ORDER ASSOCIATION. Payabl 



za&ti 



£§gli?*£S>t. e,ti,orTo»n of ^^Sitate of/K 

jjjiiiijijNThisjfr ■ < ^g^ig5y__c W . 
fiiiiiiiiihu--", — <g@^^ 



laaaaaLaiaa^ Date 

o boo 5 



THE tVESTERN (NATIONAL BANK. 

NATIONAL BANK or REDEMPTION. 

FIRST NATIONAL BANK. 

CHICAGO. IL 
CROCKER VYOOLVVORTH NATIONAL BA 

METROPOLITAN BANK 

NEW ORLEANS. 
IMPERIAL BANK OF CANADA. 

BANCO NACIONAL oc MEXICO. 



ionevoRoer. Tfruxu/rr. i 

" D A 



Fig. 40. — Form of Money Order Used as Traveler's Check 
or for Remittances. 

Place of credit in modern finance. — The promotion and 
capitalization of the United States Steel Corporation fur- 



80 FUNDS AND THEIR USES 

nished the leading sensation of the opening year of the new 
century. The dramatic feature, however, was not only 
its magnitude, — it was also the suddenness of its rise. 
Within a few months scattered and isolated plants were 
reorganized financially, and grouped under wider and still 
wider management, until finally, with a rapidity that fairly 
staggered the world, these groups concerns were absorbed 
by one gigantic corporation — a billion-dollar " trust" was 
formed. Under a system of finance more primitive than our 
own this would not have been possible. The development of 
our whole modern system of economy lay back of it ; the 
growth of great financial institutions was a necessary pre- 
requisite. Let us suppose, for example, that we had lived 
in an age of strictly money economy ; let us assume that it 
had been necessary to deliver coin to the amount involved 
in the transaction. If silver dollars had been used it would 
have taken one man fully five years to count out the change 
with business accuracy; five-dollar gold pieces would have 
shortened the process four years, but still a year would not 
have been too long a time. Under a money economy, this 
one necessity alone — the difficulty of counting and making 
change — would preclude, absolutely, the large transaction 
of to-day. By the use of modern devices, the effort in- 
volved in this element of business is reduced to a minimum ; 
a transfer of any size may be made by a simple stroke of 
the pen. Using more primitive methods than at present 
prevail, the process of accounting necessary to a consolida- 
tion such as that above referred to would have employed 
an army of men for months. Modern financial devices, 
modern financial institutions, modern systems of account- 
ing, make the transferring of large interests a matter of a 
few moments. The settlement and adjustment of con- 
stantly changing business relations are quickly effected. 
The process of "clearing," for example, allows the financial 
interests of the whole continent to be adjusted quickly. By 



TRANSFER OF CREDIT FUNDS 81 

modern financial institutions, and modern methods of com- 
munication, the world's business may be brought into daily 
contact and adjustment, if need be. In New York City 
business to the amount of $194,331,219,662.99 was settled 
through the New York Clearing-House in 1921 (an aver- 
age of $643,480,859.81 each day) without the transfer of 
any gold or money at all. In fact, for several years the 
custom has been for members simply to exchange of a 
daily average of $65,577,670.20 of debits and credits on 
the New York Federal Reserve bank. But the $640,000,000 
daily average of settlements through the clearing-house is 
only a remnant of credits liquidated in New York with- 
out the use of money. Before this remnant reaches the 
clearing-house there have been set-offs of mutual accounts 
among business houses; the settlements between members 
of the Stcok Exchanges and other exchanges; and the set- 
tlements by cancellation of debits and credits between cus- 
tomers of each bank and group of institutions represented 
by each member of the clearing-house. If in addition we 
take into account the settlement of international credits, 
we get some notion of the very small amount of standard 
money actually used to effect exchanges and settlements 
of credits. Even a country store doing a $20,000 business, 
by modern economy is able to effect its exchanges, serve its 
customers, and settle its accounts in various parts of the 
world with the actual use of a few hundred dollars. With 
a metal reserve worth a few billion dollars, held for safe- 
keeping in the vaults of the large cities — and with this 
reserve pfactically undisturbed — the commercial world is 
enabled to do its business with the use of a minimum 
amount of money-metal. Communities and nations are 
bound together by such financial and commercial ties that 
the merchant or the farmer in western Colorado or South 
Africa may purchase goods in Hongkong, New York, or 
Amsterdam without offering a grain of gold or silver in 



82 FUNDS AND THEIR USES 

exchange, and with no greater inconvenience than that of 
going to his local financial agent. Whether it be the or- 
ganization and capitalization of a billion-dollar corpora- 
tion or the purchase of a spool of thread, the same com- 
mercial solvent is applied, the same method of economy 
is employed. It is the use of a universal system of credit 
that distinguishes the business methods of the New World 
from the Old. 

BIBLIOGRAPHY 

Cleveland, F. A., The Bank and the Treasury, Chapters ii, vi. 
(Longmans, 1905.), 

Dewey and Shugrue, Banking and Credit, Chapters hi, iv. 

Dunbar, C. F., The Theory and History of Banking, Chapters 
iv, v (edited by 0. M. W. Sprague, G. Putnam's Sons, New- 
York, 1917). 

A systematic study of the subject and a standard 
manual of the development of banking practices. 

Willis and Edwards, Banking and Business, Chapter hi. (Har- 
per Bros., New York.) 

A practical discussion of the relations between business 
and banking. 



PART II 

HOW FUNDS ARE OBTAINED 



[The foregoing chapters have defined funds, and de- 
scribed them as money funds and credit funds, have dis- 
cussed the kinds of money used and the various forms of 
credit instruments. The next step is to consider how funds 
are obtained — and in this relation to review the instru- 
ments used and the manner in which these instruments 
facilitate business transactions. In other words, the pur- 
pose of the several chapters included in Part II in the main 
is to discuss the occasions giving rise to the various forms 
of credit employed in obtaining means of purchase and 
payment, the methods of creating these credit instruments, 
and some of the more important ways of using them. 
— Editor.] 



CHAPTER V 

FUNDS OBTAINED BY GIFT AND "EXPROPRIATION" 

Primitive economy; the family. — We have seen that 
exchange is the basis of modern business activity. Now, 
exchange hardly existed among primitive peoples. This 
may not seem strange when we take into account the chief 
motives for their association. The family, perhaps, repre- 
sents the most primitive group, but its purpose is not 
industrial; its bond of union is found in the instinct of 
love; its race purpose is the propagation of kind ; its plan 
of organization is one of cooperation for mutual comfort 
and for the rearing of children. To the family, industry 
is incidental rather than an organic principle. Its coop- 
eration is based on the sacrifice of interest — on the devo- 
tion of the substance and energy of ancestors and adult 
members to the young and to the comfort of one another. 
As between members of such a group, the necessities 
of life do not admit of commercial exchange without 
impairing the bond of sympathy and harmony which 
draws the members together and holds them in do- 
mestic relations. When, within the family, commercialism 
comes to *be a dominant motive, when self-sacrifice and 
mutual devotion are relegated to a subordinate place, the 
family group itself breaks down — its component members 
attach themselves instead to commercial and industrial con- 
cerns, and the family organization is lost. Within the fam- 
ily cooperative service is the vital relation ; and because 
our laws are such as to give the title to or property in 
the product of family effort to the father or father and 
mother, "gift" is the prevailing method whereby other 

85 



86 FUNDS AND THEIR USES 

members of the family obtain the means necessary to com- 
fort and enjoyment. 

The clan and the tribe. — A larger and broader associa- 
tion is developed. From motives of mutual aid families 
group themselves into clans and tribes ; but in this, as well, 
industry is not the dominant interest. Mutual protection 
is the tie that binds. Security against external foes and 
internal dissensions is found necessary to the highest wel- 
fare of all. Within this larger group public w elf are forms 
the dominant principle of organization; but the race ad- 
vantages of a smaller group for the propagation of kind 
(the family) cause it to persist within the tribe ; this still 
remains the unit for the care of the young, the unit of co- 
operation in ministration to want, of common devotion to 
the comfort and enjoyment of its members. Both princi- 
ples, however, being essential to the race, the clan or tribe 
(based upon the principle of protection), and the family 
(based upon the principle of common devotion), are 
brought into harmony one with the other. The protection 
secured by political organization gives more favorable con- 
ditions to the family, — conditions better adapted to the 
highest development of the individual members of the race ; 
the social training within the family, the authority exer- 
cised, the order established and maintained among its mem- 
bers, better fit them for the broader tribal relations. In 
the family group the various dependent members are sup- 
ported by "contributions" of those in control; with the 
larger political group those in control are supported by 
1 ' contributions ' ' of their dependents. 

Other non-industrial groups. — Other groups may be 
cited in which exchange is not necessary to harmonious and 
effective cooperation; but these, it should be observed, are 
also non-industrial in character. The Church, the club, so- 
cieties — religious, educational, fraternal, and social, of 
which many might be enumerated — have for their dom- 



FUNDS BY GIFT AND " EXPROPRIATION' ' 87 

inant principle interests that are non-industrial. Each 
of them is dependent upon an industrial group for main- 
tenance and support. Each of them has a significance in 
industrial development, and to each industrial cooperation 
is essential. These social groups have a bearing upon our 
subject, in that they strengthen the bonds of association, 
and in their purpose give direction and character to the 
organization of industry. Being non-industrial, however, 
without independent income for their support, a large part 
of their "maintenance" must come from "gift," or some 
other form of "contribution," as distinguished from "ex- 
change." 

"Gift" the funding method of dependents. — It is out of 
a condition of economic "dependence" that "gift" and 
' ' contribution ' ' arise ; as before suggested, it is with this 
method of obtaining funds that we first become acquainted. 
The helplessness of the child, the necessity for care and 
protection during that period of life when he is attaining 
strength and vigor, throws on the parent the duty and ne- 
cessity of providing for his maintenance. In primitive 
societies both males and females are industrial. With the 
development of art and invention and the means of supply- 
ing want in greater abundance, the father became the 
directing agent of productive enterprise, while to the 
mother was given over the care and training of the child. 
This increased the number of dependents; to the infant 
dependent class was added the adult females of the family ; 
and with the increase in the number of dependent members 
arose an increased necessity for contribution by "gift." 
As civilization advances, as the period of training lengthens, 
the period of dependence also grows. Children get their 
first spending money from the hands of their parents; as 
they grow to maturity, the parental instinct which is so 
necessary to the maintenance of the child during his infancy 
persists ; the interest which the father and mother feel in 



88 FUNDS AND THEIR USES 

the development of their offspring is consideration sufficient 
to cause them still to extend the means necessary to mainte- 
nance and comfort. This first goes out in the form of pro- 
viding training which would better fit the youth to move 
and act with his fellows in the varied circles of life. In 
this the aim of parents is so to equip their offspring that 
they may enter into the complex relations of life capable of 
making judgments and of understanding the conditions 
necessary to highest success. Their hope and their aim are 
to raise the young, through a longer period of dependence, 
to a place of highest independence. This preparation, from 
the beginning, involves the use of funds, but in most cases 
the experience of the young is limited to the one way of 
acquiring them — viz., voluntary contribution. 

"Gift" and contribution usually take the form of 
funds. — Where "exchange" becomes established as an 
essential part of industrial economy, ' * contribution ' ' neces- 
sarily takes the form of "funds" as the more effective 
means of granting support. Mother, child, missionary, 
priest, church organization, social or fraternal society — 
every person, or non-industrial institution, that holds a 
position of dependence, must, as a basis for their claims, 
look to the gifts and other forms of contribution of those 
in control of industrial income for their means of support. 
The regard for kin, the desire for social preferment, the 
response to ideals of higher civilization, national advance- 
ment and progress, the influence of public opinion and the 
pressure of tradition and custom — these and other social 
ties bring those whose commercial and industrial activities 
give them possession of funds into close touch with those 
who look to them for support. It is the strength of these 
"ties that bind" that determines the welfare of the eco- 
nomically dependent. 

Funds obtained by "inheritance." — Inheritance is simply 
one form of acquisition by ' l gift. ' ' It rests on the assump- 



FUNDS BY GIFT AND "EXPROPRIATION" 89 

tion that the properties acquired by the ancestor, which he 
himself does not use during his life, and which are not dis- 
posed of to others during his life, are intended to be given 
to his heirs. The child, during his minority, has been a 
dependent ; for his support he has relied upon gifts. When 
he has reached his maturity, the same interest and regard 
which caused the father to give support and provide social 
and educational advantages, suggest the propriety of giving 
the boy his "start" in the business world. He recognizes 
the advantage of capital for business — of initial funds for 
the organization and management of industry. He knows 
that without some contribution of this kind his son for years 
will be unable to exercise his highest talents for leadership 
in his several undertakings or life work. Funds are there- 
fore provided by the parent for the business activity of 
the son, as they have been given before for support. With 
the family as a unit in social organization, with the law of 
property as the underlying industrial principle, inheritance 
passes into our system as a part of the law governing our 
institutional and social life. It is assumed that the an- 
cestor, unless he otherwise bequeaths his property during 
his life, would have divided it among those dependent upon 
him at his death ; that it is in their interest and for their 
welfare that he has put forth the effort to obtain the funds 
and properties which he possesses, and that this advantage 
would be preserved to the members of the family were his 
will expressed in a formal act. An acceptance of the prin- 
ciple of "trusteeship/ 9 however, as laid down by Mr. Car- 
negie in his Gospel of Wealth, would give quite a new 
application to the law of inheritance. Mr. Carnegie says 
that the acquisition of wealth is the result of a great coop- 
erative process in which the whole society of workers 
(dependents as well as non-dependents J take part; that 
for the purposes of carrying on this process to the highest 
advantage of all, some must give direction while others 



90 FUNDS AND THEIR USES 

must attend to the minute details. Each and all, however, 
have assisted in the production of the means of enjoyment. 
While cooperation is advantageous for the purposes of 
producing" the means of enjoyment, it is only by distribut- 
ing this to the individual members that the means may be 
enjoyed — i. e., the means, thus produced, must be applied 
to a use which will give satisfaction to individual want, and 
this can best be determined by each member for himself, 
i Or, to put it in another way : while there is advantage in 
cooperation, the principle of personal freedom requires 
that this cooperation must be voluntary, and both the 
product to be used and the use to be made of the product 
must be determined by the individual who feels the want. 
No man shall be a slave. As a means of securing personal 
freedom and at the same time of obtaining the benefits of 
cooperation, the amount to be distributed to each as a 
return for cooperation must be left to a previous arrange- 
ment. Now, as Mr. Carnegie reasons, if under these ar- 
rangements or contracts for free cooperation the managers 
and directors have left to them a large surplus — a surplus 
disproportionate to their service, and disproportionate to 
their own needs and the needs of those dependent upon 
them, — then these men should consider that they hold this 
surplus as a fund "in trust" for the whole society. To 
quote the words of this great director of cooperative indus- 
try, whose feeling went out toward his fellows, and who 
with his enormous wealth took a large social view of his 
responsibility, it is the duty of the man of wealth "to 
set an example of modest, unostentatious living, shun- 
ning display or extravagance ; to provide moderately for 
the legitimate wants of those dependent upon him; and, 
after doing so, to consider all surplus revenues which come 
to him simply as trust funds, which he is called upon to 
administer in a manner which, in his judgment, is best 
calculated to produce the most beneficial results to the com- 



FUNDS BY GIFT AND "EXPROPRIATION" 91 

munity — the man of wealth thus becoming the mere trustee 
and agent for his poorer brethren, bringing to their service 
his superior wisdom, experience, and ability to administer." 

While this view has not been accepted and adopted as a 
legal principle or an ideal, it is coming to have a wide 
influence. An increasing number of men of wealth have 
recognized their obligations to society, and in the discharge 
of this obligation have bequeathed vast sums for com- 
munity and welfare objects. Whatever be the governing 
considerations, this fact must be recognized that gift and 
bequest play an important part in the economy of society. 
All of the property accumulated by ancestors must be 
passed on, since they cannot exercise control over it after 
they are dead, further than society will permit their "will" 
to be impressed upon it. 

Laws of inheritance. — The law of inheritance is a rule 
which has grown out of the common impulse to care for 
and support dependents ; this impulse was evolved at a time 
when the producing power of a group did not more than 
suffice for support of its members. It is an expression of 
the common experience and common motive of the race 
directed toward its own perpetuation. As before the death 
of the ancestor all property acquired during life "belongs" 
to him ; at the time of his death, by operation of the law 
of inheritance, the property of the ancestor passes to his 
natural heirs according to an established rule of descent — 
in so far as the common law or rule is not varied or set 
aside by a formal expression of the "will" of the ancestor, 
in which case "the last will and testament" governs. The 
formal expression of the decedent's "will" is known as a 
1 ' devise, ' ' and the property or funds inherited in this way 
are said to be " devised ' ' — i. e., they are passed on by him 
to others in the same manner as if he had disposed of them 
during his life. Laws controlling inheritance are necessary 
and wholesome. However, they may have the effect of pro- 



92 FUNDS AND THEIR USES 

tecting the use of funds and properties in the hands of the 
incompetent. Where such laws exist, the effect is to change 
the relation of dependence from one based on social welfare 
to one carrying with it social degeneration. Industrial 
dependence which is found to exist between members of a 
family, and which is incident to the maintenance of the 
church, to the support of fraternal and social organization, 
is the result of the sacrifice of a lower to a higher interest. 
The perpetuation of race in greatest strength and vigor, 
the fostering of social and educational ideals, mutual pro- 
tection and national welfare, are as necessary to a people 
as is physical maintenance and support. To this end many 
persons in our society have accepted places of industrial 
dependence in their devotion to higher interests. For this 
reason it is held by many of the great social and industrial 
leaders of to-day that those who are engaged in control of 
the industrial or business pursuits, and into whose hands 
the properties and incomes of the industrial society come 
for distribution, must be regarded as holding them "in 
trust" for all the members who are devoting their lives 
to common well-being. Laws of gift and inheritance which 
stand in the way of such a distribution as will further this 
interest, which condone "breaches of trust" — laws which 
have been developed from ideals of private monopoly, and 
which have come down from those legal systems in which 
"arbitrary power"- took the place of the more modern 
notion of free cooperation — are constantly the subject of 
legislative modification and political interest. Many 
changes have already been made, notable among them the 
abolition of the rule of primogeniture and the adoption of 
the "community property law" by several of our states, 
wherein the father and the mother are put on an equal 
footing as trustees of all property acquired during the mari- 
tal period. It remains only for our great political society 
to determine in this, as in all other matters of public inter- 



FUNDS BY GIFT AND "EXPROPRIATION" 93 

est, what rules of social justice they shall establish. It has 
been largely out of regard for concepts of social justice that 
the inheritance tax has been adopted. 

Funds obtained by "expropriation." — "Expropriation" 
is the process of taking property by force. It rests on 
quite a different principle from "gift" or "inheritance." 
Instead of assuring inferiority and dependence on the part 
of the recipient or beneficiary, and superiority and inde- 
pendence on the part of the contributor, the situation is 
quite the reverse. The only points of similarity are : that 
in neither is the transaction one of exchange ; and in both 
there is what a lawyer would call a "good," as distin- 
guished from a "valuable," consideration. That is, the 
consideration for making the transfer is one which is rec- 
ognized as "good," in that it is in harmony with good 
public policy ; but it is not based on a process of valuation 
in which each party thinks he has improved his condition, 
or profited by the transaction. The transferor is left 
poorer, and the transferee is made richer by the amount 
or value of the property or fund "expropriated." 

As a method of funding ' ' expropriation ' ' may be justi- 
fied, therefore, only in such cases as the use of superior 
force may be justified in taking property away from its 
owners. International law justifies "expropriation" when 
an invading army, having possession and control of a ter- 
ritory, levies and enforces "contribution" from the civilian 
population. "Expropriation" may take the form of 
"condemnation," "taxation," or "forced loans." Con- 
demnation usually does not apply to funding operations; 
but the Government may, in time of emergency, for ex- 
ample, seize money stocks in order to conserve their use 
as a basis of credit. Technically a forced loan is one in 
which the Government makes extraordinary levies and 
forces its citizens to respond to them in forms of money 
or exchange which the Government may use, giving in ex- 



94 FUNDS AND THEIR USES 

change a promise to repay at some remote future date. 
In actual practice, however, those who are in charge of 
large private funds may in effect be forced to support the 
Government in the form of loans that are executed as if 
they were negotiated in the open market. The chief method 
of funding the current needs of the Government is that of 
taxation. This subject is such a large one and so many- 
sided that its treatment is not attempted here. 



BIBLIOGRAPHY 
Carver, T. N., Principles of National Economy, pp. 3-60. 



CHAPTER VI 

FUNDS OBTAINED BY EXCHANGE 

"Exchange" is the common method of obtaining funds 
—the only method that belongs properly within the field of 
' ' economics. ' ? A young man may have capital given to him 
by his father with which to begin a business career; by 
"will" or bequest he may receive a certain amount of 
money or other funds. Usually when other property is 
inherited, this will not serve the purposes of the one inherit- 
ing it unless he takes up and carries on the business of his 
father. Except in such cases, therefore, he will convert into 
funds the property inherited and then apply these to his 
own uses. An inquiry into the prevailing financial methods 
of obtaining funds, therefore, is limited almost wholly to 
exchange. The significance of this fact is that (except when 
funds are received by gift) the only way in which a work- 
ing capital may be obtained is by having something to 
sell — one must have something to offer, something for 
which others will give money or credit which may be used 
as funds. 

Limit to funding power. — In this appears the limitations 
of men in their efforts to secure capital; in this may be 
found the reason why each of us may not obtain all the cap- 
ital funds that may be desired. Before we can fund our 
enterprise , we must have something which those possessed 
of funds will receive in exchange for them. The idea so 
often found in the literature of money and credit that cer- 
tain forms of money need have no value, that they may 

be created by "fiat" of Government or by the "dictum" 

95 



96 FUNDS AND THEIR USES 

of some arbitrary or influential person, is absolutely with- 
out foundation in business experience. 

Capitalists. — The capitalist of to-day is the man who has 
funds for sale ; he is a funds merchant. He sells his funds 
only when in his judgment he gets something in return 
which will be more valuable to him than the funds sold. 
He trades on precisely the same principle as the hardware 
merchant or the fruit dealer ; the only difference is that the 
latter offers his wares for funds, while the capitalist offers 
his funds for other properties — usually for investments. 
One should no more expect to obtain capital funds without 
offering something in return than one should expect to 
obtain groceries or clothing without giving a quid pro quo. 

What may be offered for capital. — Let us suppose for a 
moment that you were about to begin business ; that you 
had not inherited any property from ancestors ; that you 
had received nothing by way of gift with which to "make 
a start in life. ' ' How would you proceed to raise the funds 
necessary? What would you have to sell? What could 
you offer to the man of means — the capitalist, the funds 
merchant? This question may seem entirely outside the 
field of finance. Not so. It is here that finance begins. 
It is this beginning that takes thousands of men and boys 
to the workshop. 

Sales of Labor 

In going out for employment laboring men are answer- 
ing this question in a practical way. What have they to 
sell ? Their labor ; their ability to serve those who have 
capital. Funds to them, as to others, have a double signifi- 
cance: (1) The first necessity that the laborer must face is 
that of maintenance. His power to serve others depends 
on his maintaining himself in strength and vigor. His in- 
come depends on continuous service. Unless he can so sus- 
tain himself as to serve with ability those to whom he sells 



FUNDS OBTAINED BY EXCHANGE 97 

his labor, income will cease. The first necessity, therefore, 
is for "maintenance funds." Let income fall below this 
mark and all possibility of industrial independence is gone. 
(2) The second problem to be solved in the funding scheme 
of the laborer is so to dispose of his services as to leave a 
surplus over and above the expense of maintenance — some- 
thing which may be laid by as " ' capital surplus. " It is by 
use of this surplus that industrial equipment must be pro- 
cured. Ordinarily the getting together of the capital funds 
needed to equip a business requires a long-continued process 
of exchanges of labor for wages, of saving a surplus, of 
accumulating this surplus into a fund which will be suffi- 
cient for his purpose, of expending it for "investments" 
or for ' ' betterments. ' ' Assuming that one has nothing else 
to offer, this is the only means possible by which one may 
procure capital for business. 

Saving. — Saving is the process whereby capital funds 
are accumulated from surplus earnings. Capital funds 
acquired from earnings are the remainder after the sub- 
traction of expense, fixed charges and losses. In the early 
part of the last century, when industrial capital was small, 
the problem of saving was the most important one con- 
sidered by economists and writers on finance. At that time 
the problem was one for the individual to meet single- 
handed; to-day large financial companies are organized to 
facilitate saving — to help the laborer accumulate a capital. 
The small savings of the many are accumulated into large 
funds, which not only serve as a protection to the laborer 
himself, but which in the mass of accumulations furnish 
capital to large enterprises that give him further employ- 
ment. 

Importance of training. — In this relation appears the 
importance of business training. The man who is trained 
only as an ordinary laboring man, the man who can not 
do more or better in serving those who possess means than 



98 FUNDS AND THEIR USES 

any other man on the street can do, must compete with 
him in the market. Among the many competing 1 for work, 
some will be found who are willing to exchange their serv- 
ices for a wage barely sufficient to maintain them in bodily 
strength and comfort. If one is able to do only such work 
as these offer to do, then one must bring his standard of 
life below theirs; otherwise no margin or surplus will be 
left for capital use — a fund can not be acquired by saving. 
It is only by adopting a low standard of living that the 
Chinaman is able to "save." But what is your advantage 
if you have superior training? While perhaps you have 
inherited no money, have had no capital funds given to you 
by family or friends, you have a "gift" which has quality 
quite as productive of income. More than that, while you 
retain your faculties you may always maintain an advan- 
tage over the ordinary laborer. It is this in part which 
has inspired your natural guardians to devote so many 
years to your training. Without a dollar, you are able to 
go out into the world, to maintain a standard of life that 
allows you still further to develop your faculties, still fur- 
ther to handicap your competitors, or to lay by "in invest- 
ment" an increasing fund with which you may finally 
equip yourself for the successful employment of the skill 
and labor of others in the management of a business of 
your own. 

Sales of Tangible Property and Business Interests 

Sale of goods produced by labor. — Instead of selling 
your labor to others, instead of exchanging your services 
for income in the form of wages, you may decide, after 
the first funds are saved, to begin business in a humble way 
on your own account. Possibly you may undertake the 
business of shoemaking. Having saved enough to buy a 
small outfit, a few sides of leather, and having enough for 



FUNDS OBTAINED BY EXCHANGE 99 

a month's living besides, you may leave the factory where 
you have been employed and open a shop of your own. 
Let us suppose that one pair of shoes may be made in a 
day, and that the cost of materials and of living were $3 
per day. It would not be long before all your funds would 
be exhausted; but, instead of funds, you would have the 
products of your labor. Funds for future production must 
come from the sales of these products. If each pair of 
shoes might be sold for $5 per pair, then, if there were no 
items of loss, you would have a profit of $2 on each. This 
amount, by a strict economy, might be added to your cap- 
ital. Accumulated funds from sales of shoes would allow 
you constantly to increase your business equipment. If, on 
the other hand, you were unable to dispose of your product 
in competition with the factory for more than $3 per pair, 
then a bare living would remain — your business would just 
pay expenses. A further reduction in price would cause 
your capital funds to disappear ; it would become necessary 
for you again to fall back on the sale of your services to 
others. To those successfully employed in the management 
of industry, the chief source of revenue is from sales of 
the products of labor. 

Sales of property not adapted to capital employment. — 
It often happens that one has properties not adapted to 
capital use. A private residence or a large private park is 
inherited ; investments that yield a fixed interest or rental 
may be owned. These are not funds for business; they 
can not be utilized to advantage in the enterprise about 
to be undertaken. To one so situated the most practicable 
way of obtaining funds may be by the sale of these proper- 
ties. By conversion of these forms of wealth into capital 
funds a business may be equipped which will produce in- 
come in the form of profits. 

The sale of one business interest to capitalize another. 
— The shoemaker after equipping a factory may recognize 



100 FUNDS AND THEIR USES 

a better business advantage in another locality. He may 
find that by moving to an inland point he can get water 
power where now he is required to use steam. The growth 
of population in new territory and the building of new 
railroads may give advantages for obtaining raw materials, 
and at the same time place him within range of a general 
market for his goods. He can not remove his plant, how- 
ever, to advantage. Much of the machinery would not be 
adapted to water power. He decides to sell his plant for 
what it will bring, as a means of obtaining funds for the 
new enterprise. A miller may have inherited a cotton 
factory from a brother. Every business advantage sug- 
gests the propriety of disposing of the cotton plant and 
using the funds to further his milling interests. This is 
one of the most common methods of obtaining funds in a 
country where industries are constantly shifting, as in 
our own. 

The sale of business interests. — Labor and tangible 
property are not the only things that may be exchanged 
for funds. Business interests may likewise be disposed of. 
Let us suppose that the miller has been making a consid- 
erable profit out of his business. But it appears that a 
still larger return may be had if he doubles his capital. 
His plant is a comparatively old one ; he is now grinding 
50 barrels of flour per day at a cost of $1 per barrel. Yet, 
owing to his favorable location, he is able to make a profit 
of $1 per barrel in competition with others. By the addi- 
tion of as much more capital (say $50,000), by using it to 
put in improved machinery and labor-saving devices, he 
would be able to grind at a cost of 50 cents per barrel and 
turn out 200 barrels per day. Instead of having a profit 
of $50 per day with a capital of $50,000, he would with 
his better equipment get a return of $300 per day on a 
capital of $100,000. But how is he to obtain funds? He 
can not hope to raise the money from the sale of his serv- 



FUNDS OBTAINED BY EXCHANGE 101 

ices. His profits are already greater than would be the 
return in wages. He can not afford to wait until, by 
sales of goods produced, he may accumulate $50,000 more 
in funds. He has no properties other than those already 
employed in his business. He decides, therefore, to obtain 
the additional capital by selling an interest in his enter- 
prise. 

Sale of partnership interest. — Fortunately he finds an- 
other miller who has $50,000 in funds, and who is looking 
for a business opening. The books of the mill are gone 
over and its present earning capacity is calculated ; the cost 
of improvement and the probable increased earning power 
is computed; the whole situation is carefully canvassed. 
Each of the two men looks into the business standing and 
reputation of the other. They finally come to an agree- 
ment. The first miller sells a partnership half -interest in 
his concern upon the condition that the second miller will 
put in $50,000 more of funds. With this the mill is newly 
equipped; there is an increased return in profits to each. 

The sale of corporate shares. — With the development of 
the wheat supplies and the wheat-growing resources of the 
vicinity in which the mill is located, the partners find that 
they are still unable to supply the market with flour at a 
price that gives them a handsome return in profits to the 
company. Three-fourths of the wheat grown in the vicin- 
ity is shipped away for grinding, while they are not using 
more than one-third or one-quarter of the water power 
already developed. The question again arises, How may 
they obtain the capital with which to equip their industry 
in such manner as to take advantage of the present business 
situation ? To do this will require an expenditure or four 
or five times the amount expended in their present plant. 
They find no other miller who wishes to join with them in 
the business; they have no properties to sell by means of 
which they may secure the funds. They finally decide to 



102 FUNDS AND THEIR USES 

incorporate the business — i. e., to offer shares to those who 
have capital to invest, but who are not millers, and who 
would not care to participate as partners. By placing 
shares at $100 a piece on the market, they are able to sell 
2,000 shares. In other words, they find that they are able 
to obtain $200,000 additional capital made up of receipts 
from sales to "stockholders" of shares in the corporate 
proprietorship. With the additional $200,000 they build 
two other mills of capacity and equipment similar to the 
first. 

Capital stock. — Capital stock is the total amount of cap- 
ital funds of a corporation invested by its shareholders. 
The certificates of interest held by investing' members are 
called l ' stock. ' ' Another term commonly used is ' 'shares. ' ' 
This term is almost exclusively employed in England. 
There, "stock" has the same significance that the term 
"Government security" has in America. The stockhold- 
ers of a corporation are those who make the joint contribu- 
tions to the capital funds or capital stock of a corporation. 
They have (1) such corporate rights as: To participate in 
the organization of the company, to attend meetings of 
stockholders, elect officers, to hold meetings for the purpose 
of determining the powers to be granted and the rules 
governing their officers and agents, to give direction to the 
general policy of the corporation through the officers 
elected, etc.; (2) the financial rights, first, to share in the 
dividends set apart for the shareholders out of the net 
profits of the business of the corporation ; and, secondly, to 
have a share in the capital distributed to the stockholders 
after the corporation proper has been sold and its affairs 
wound up. While the corporation exists, however, the 
stockholder has no right to touch a dollar of its assets or 
transact any of its business. The capital once contributed 
becomes the property of the corporation absolutely. The 
stockholder may be said to have sold a certain amount of 




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104 FUNDS AND THEIR USES 

his money, or credit, or other property, to the corporation, 
and in return has received one or more shares of its capital 
stock, the amount being estimated in the funds-equivalent 
or price of that which has been sold. For example : In the 
organization of a corporation a certain amount of the stock 
may be issued in exchange for plants purchased at an 
agreed price, while other shares may be sold for "cash." 

No one may transact any business for the corporation 
except a duly authorized officer or agent. The business of 
a corporation is in the hands of its officers. The assets 
of a corporation belong to the corporation as fully and 
completely as the moneys in the Treasury of the United 
States belong to the Government. A stockholder has as 
little right to appropriate assets and to attend to the busi- 
ness of the corporation as has a private citizen to take 
money from the public treasury or to attempt to do the 
business of the Government. 

Stock certificates. — A stock certificate is the written 
evidence of a proportionate amount of the total capital 
which has been invested by a single stockholder in the stock 
of a corporation. The capital stock of a corporation is 
usually divided into shares having a funds-equivalent of 
$100 each. That is, if a company were organized with a 
capital of $100,000 they would have 1,000 shares of stock 
to sell. Each person who buys or subscribes for "stock" 
receives a "certificate" which indicates the number of 
shares which he has purchased by exchange of money or 
other property. 

Difference between corporation and partnership. — The 
differences between a corporation and a partnership are 
many. In the first place, each partner may transact any 
business for which the partnership was organized, and each 
partner is liable for all the debts of the partnership. In 
a corporation, however, the stockholders have no right to 
transact any business of the concern, this being left to the 




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106 FUNDS AND THEIR USES 

appointed agents and the stockholders individually are not 
liable for the debts of the company. The responsibility 
of a stockholder is generally limited to the amount of his 
stock purchase. If the business is poorly managed he may 
not receive dividends on his stock ; through the bankruptcy 
of the corporation he may even lose his invested capital; 
beyond this, however, he is seldom held liable. In some 
cases, as in banking concerns, stock liability is somewhat 
enlarged, and the stockholder is held responsible in double 
the amount of his investment. With the death or with- 
drawal of a partner the partnership becomes dissolved, and 
the business of the partnership must be wound up. The 
death of a stockholder does not in any manner affect the 
life of the corporation. Its business may go on regardless 
of stock ownership. A partnership interest may not be 
sold without the consent of the other partners ; a stock 
certificate may be transferred at the pleasure of the owner. 
Financial advantage of the corporation. — Aside from 
those above enumerated, the advantage of corporate or- 
ganization is found in the amount of capital funds or funds- 
equivalent of property that may be secured in this way. 
So long as it is made to appear to the investor that he 
can obtain a fair return in dividends, there is practically 
no limitation to the amount of capital that may be drawn 
together by the sales of stock. Being assured of competent 
management, the man with $100 may contribute with the 
same degree of confidence and the same prospect of return 
as the man with $1,000 or $10,000. The only limit to 
capitalization is found in the limit of profits. The fact 
that the business itself is a local one, however, may so far 
confine the knowledge of its management and of its profit- 
able character to its managers that but few persons having 
funds to invest will care to purchase shares ; such an indus- 
try as milling, therefore, is usually confined to a local 
investing constituency. 



FUNDS OBTAINED BY EXCHANGE 



107 



Common stock. — The partners to the milling enterprise 
had found a market for 2,000 shares of stock. Besides, the 




mm 



Fig. 43. — Non-Cumulative Preferred Stock (One-Fourth 
Actual Size). 

old plant of the partners was turned into the corporation 
at a valuation equal to $100,000 ; in the new corporate con- 



108 



FUNDS AND THEIR USES 



cern each of the partners was given $50,000 worth of stock. 
This made the total capital stock $300,000. These con- 
tributions were all made under similar conditions and con- 
ferred on the purchaser similar rights. The common stock 




Fig. 44. — "Common" of Finance Company (One- Fourth Actual Size) 



FUNDS OBTAINED BY EXCHANGE 



109 



of a corporation is that representing the interest of contrib- 
utors of properties or funds who are entitled to dividends 
and to exercise corporate powers without preference. 

Preferred stock.— After the expenditure of the $200,000 




Fig. 45. — "Preferred" of Finance Company (One-Fourth Actual 

Size). 



110 FUNDS AND THEIR USES 

contributed, the wheat-growing region suffered a drought, 
and the supplies of wheat for milling fell so far short of 
former yields that the plant could not be run to more than 
one-third its capacity. Moreover, the wheat was of inferior 
quality and the flour produced could not be sold at a profit 
in competition with flours ground in other places. At the 
end of a year it was found that the milling company had 
suffered a loss of $50,000 — had incurred a floating debt, 
payment of which was demanded. This gave rise to a new 
situation — a new demand for funds, one which could not 
offer a "profitable" business as a funding base. Under 
such circumstances the common stockholders decided to 
hold a meeting to determine how the $50,000 might be 
raised. They did not feel disposed or able to purchase 
more shares in the stock" of the corporation. Another expe- 
dient, however, was at hand — the issue of preferred stock. 
The preferred stock of a corporation is usually given to 
secure some obligation of the company or to meet some spe- 
cial demand for capital when common stock may not be 
disposed of to advantage. To this class of stock are given 
speeial dividend privileges — that is, this kind of stock is 
entitled to a preferred claim against the profits of the com- 
pany. If a man holds a share of preferred stock he will 
receive dividends on it before any dividends are given 
to the common stockholders. The contract of preferment, 
as in the case of the Loder Brewing Company, may also 
give a first claim to holders of preferred stock on distribu- 
tion of funds in the dissolution of the company — the pre- 
ferred stock may be given a right to have its proportion 
of capital repaid before any distribution is made to the 
common stock. This being a bad year for the mill, and 
there being a prospect for a future profit, such an arrange- 
ment allowed the common stockholders to dispose of pre- 
ferred shares for funds with which to pay the floating debt 
of the corporation. 



112 FUNDS AND THEIR USES 

Kinds of preferred stock. — There may be several kinds 
of preferment — e.g., the common stockholders together 
may decide to offer to those who will contribute new cap- 
ital a preferred right to have 6 per cent dividends paid to 
them out of the funds set aside for the payment of divi- 
dends before the common shareholders shall receive any- 
thing at all. Again, an agreement may be made whereby 
the preferred stockholder may have a first distribution of 
6 per cent in preference to the common, and then after the 
common stock shall have received 5 per cent, if there be 
any profits remaining, the preferred stockholder may have 
a preferred right to 3 per cent more. 

First preferred and second preferred. — If, later, another 
contribution becomes desirable, and the common together 
with the first preferred stockholders are not able to fur- 
nish the funds needed, they together may agree to offer 
for sale another series of shares which shall take precedence 
over both former . issues, and in which the new issue shall 
stand as first preferred and the others in their former 
dividend-paying relations. The new preferred, therefore, 
would have first claim, the old preferred second claim, and 
the common would have third claim to dividends. 

Cumulative and non-cumulative preferred. — The condi- 
tions of preferment may be such (in case dividends are 
not declared at a regular time agreed upon and to the 
amount provided) that the amount of dividend which is 
"passed," that is, which passes over as not paid, shall 
"cumulate" and become an additional charge against the 
amount set apart as dividends to be paid to the preferred 
stockholder out of future profits before the common stock- 
holder may participate. If no such provision be made in 
the contract of preferment, however, the stock is "non- 
cumulative," and a "passed" dividend will be lost to the 
preferred stock. Under the cumulative feature of pre- 
ferred stock, it will be readily understood, a number of 




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114 FUNDS AND THEIR USES 

"passed" dividends may become such an enormous charge 
upon the future earnings of the company as to render the 
common stock practically worthless. On the other hand, 
the "non-cumulative" feature may allow the common 
stockholders, through their officers, to delay the payment 
of dividends on preferred until such a, surplus has been 
acquired by the company that the common stockholders 
may receive much more than their proportionate share of 
the profits; without a cumulative preferment, the repre- 
sentatives of the common stock may continue to apply the 
profits to improvements until the industry shall become 
so highly profitable through added capital that the regular 
return to the common stock may far exceed that which is 
fixed for the preferred. 

Assessed and Non-Assessed 

Trust certificate. — It sometimes happens that a number 
of stockholders may wish to pool their holdings in a com- 
pany for purposes of control. To this end the stockholders 
agreeing will appoint a trustee to hold the stock and exer- 
cise all rights of control for them. The trustee gets his 
powers from a written trust agreement, under which he 
pays to the several stockholders the dividends declared, 
and finally delivers the shares after the trust agreement 
is terminated. When such an arrangement is made the 
trustee issues to each stockholder depositing his stock a 
trust certificate. One of the trust certificates issued by 
J. P. Morgan & Co. as trustee for Reading First Preferred 
is given on page 113. An examination of the certificate 
will further explain its use. 

Other forms of stocks. — Other special forms of stock, 
such as guaranteed stock, founder's shares, treasury stock, 
etc., are allowed under the laws of some States. These 
might be enlarged upon, but for the purposes of this 



FUNDS OBTAINED BY EXCHANGE 115 

treatise it is sufficient to call attention to the principal 
proprietary interests which may be sold as a means of ob- 
taining funds for enterprise. A new form has come into 
use during the last few years, authorized by statute in 
some of the states, which carries no par value. The cer- 
tificate simply shows what proportionate interest in the 
proprietary capital the holder is entitled to. We pass now 
to a consideration of sales of credit. 



BIBLIOGRAPHY 

Cleveland, F. A., and Powell, F. W., Railroad Finance, Chap- 
ter iv. 

Dewing, A. S., The Financial Policy of Corporations. (Ronald 
Press, New York, 1920.) 

Lough, Wm. H, Business Finance. (Ronald Press, New York, 
1917.) 

Mead, E. S., Corporation Finance. 



CHAPTER VII 

FUNDS OBTAINED BY SALES OF COMMERCIAL 

CREDIT 

There are still other ways of obtaining funds by ex- 
change — methods which do not involve the sale of labor, 
tangible properties, or business interests. If one has 
salable credit, this may be disposed of to meet the funding 
needs of business. In Part I credit was discussed as a 
form of funds. We will now discuss its use as a means of 
obtaining funds. 

The extent of credit uses by the laboring man. — Credit 
is bought and sold in the market in the same manner as 
are services, or stocks of merchandise. Before a sale of 
credit may be made, however, one must find a purchaser — 
someone who is willing to exchange money or credit funds 
for a promise to deliver money at a future time. In this 
is found its limitation ; it is this that places it beyond the 
reach of the ordinary laborer as a means of obtaining capi- 
tal. The day-laborer goes to the man of means (the capi- 
talist), and proposes to give him his promise to pay $110 
one year hence for $100 in gold. The man of means says 
"No." Some such reasoning as this goes on in the capi- 
talist's mind: "You have never been able to do more than 
maintain yourself." "Yes, it is true you have paid your 
account at the grocer's; you have kept faith with those 
who have furnished the means necessary to 'maintenance' 
on credit, but you have never displayed any ability to 
acquire 'capital.' " "What surplus earnings you have 
had were dissipated." "You have not the ability nor the 
integrity to make your credit good." In other words, in 

116 



FUNDS BY COMMERCIAL CREDIT 117 

the judgment of the capitalist, the credit which the labor- 
ing man tries to dispose of for capital funds is seldom 
considered worth as much as the money for which it is 
offered. The capitalist will not trade. 

The man of ability and integrity. — Having thrifty 
habits and good training, on the other hand, you may meet 
with greater success. Leaving college you may go to a 
banker to whom you are known and offer him your note. 
At first he may be unwilling to buy your credit. You may 
even have trouble to find a business manager who is will- 
ing to buy your services. But eventually you get employ- 
ment. You demonstrate your ability. You show yourself 
to be a man capable of performing a service for which em- 
ployers are willing to pay $1,000, or $2,000 per year. You 
exhibit some special fitness for the management or direc- 
tion of some industrial function; perhaps you have in- 
vented something, the use of which will be of advantage in 
production; you demonstrate that you have the power to 
form judgments of such superior quality that a business 
dependent on such decision may be handled with increased 
profits. Now, without capital, with nothing but this 
ability displayed, and a reputation for habits of industry 
and integrity, you again approach the man of means and 
offer your credit for funds with which to capitalize your 
advantage, and he is willing — even anxious — to exchange. 
Why is this? Why are you able to procure capital funds 
"on credit," without awaiting the slow process of saving, 
while thousands of others are required to depend on the 
surplus accumulated from wages earned? The answer is 
plain. The capitalist believes that he is making a good 
trade. You have something to sell, besides your ability to 
work for others, which he values more highly than he does 
the amount of money for which credit is offered — your 
ability to use capital in such a way that you will be able 
to deliver the amount obtained "with interest." The man 



118 FUNDS AND THEIR USES 

of means sees in the transaction a profit to himself. In 
exchange for funds sold, he gets a claim to future income 
which, in his judgment, will be to his own advantage. 

The man with property. — One possessed of tangible 
property or business interests has still less difficulty in 
convincing the capitalist of his ability to meet his contracts 
for future delivery. He offers to sell credit because he 
does not care to sell his tangible property or business in- 
terests. The property gives a double advantage: by its 
use a larger income is assured; if this larger income does 
not suffice, the property is still capable of being sold as a 
means of obtaining "funds" with which to meet credit 
contracts. All of this is taken into account by the one to 
whom the man with property offers to sell his credit. 

Credit Intruments Used as a Means of Obtaining Funds 

Promissory note. — Bank credit has been described as 
a memorandum account which carries with it the promise 
of the banker to pay to the owner of the account the 
amount of money stated "on demand." A promissory note 
is a written contract for the future delivery of a specified 
sum of money. The delivery must be made on or before 
a stated time, and nothing will satisfy the contract except 
the delivery of the particular thing promised. 

Form of note. — There is nothing fixed or prescribed 
about the form of the promise ; it may be expressed in any 
way so long as its essentials are present. These essentials 
will be set forth in detail. 1 

As to parties. — Being a contract in writing, the parties 
must be set forth in the instrument. There must be at 
least two parties named — the one to whom the promise is 
made and the one making it. The one making the note is 



i In the descriptive text which follows, no attempt is made to 
cover all the requirements of contracts — only those peculiar to 
promissory notes. 






FUNDS Bit COMMERCIAL CREDIT 119 

called the maker ; the one to whom it is made is called the 
payee. The maker usually signs his name under the writ- 
ing which carries the promise. There may, however, be 
two or more makers of the same note. A note that has 



Johnstown, Pennsylvania, June 20, 1921. 

Thirty days after date we jointly promise to pay 
to Sylvester Jones, One Thousand Dollars, with in- 
terest at the rate of six per cent per annum. 

Bird well, Smith & Brown, 
by Vaughan Brown. 



Fig. 48. — Note, Non-Negotiable. 

two or more makers is called a joint note. Joint notes may 
be made by each individual signing his name individually, 
or in case several persons are combined in business rela- 







^^» »»»» 




Fig. 49. — Note, Without Payee. 

tions as partners, one of the partners, or one authorized to 
sign the partnership name, may subscribe the name of the 
partnership and bind them all. The payee may be the 



120 FUNDS AND THEIR USES 

one whose name is inserted in the note at the time it is made 
and delivered. Commercial usage, however, has allowed 
the words "or order" to be added. Such expressions as 
"Pay to [name of payee] or order," or "Pay to the order 
of [name of payee]," indicate that the one named may, in 
writing, direct payment, or delivery, to be made to some- 
one other than himself. On page 119 (Fig. 49) is a form 
of note that is defective, for the reason that no payee is 
named in the instrument. This defect may be overcome 
by negotiating the note. 



Baltimore, Maryland, January 10, 1921. 

On the first day of September, 1921, we promise to 
pay to Martin Lowden, or order, the sum of One Hun- 
dred Fifty Dollars, with interest from date at four 

per cent till paid. T _. 

Louis Sampson. 

J. L. McKenzie. 



Fig. 50. — Note, Negotiable. 

Words of transferability. — The right granted to the 
payee named, to order payment to be made to another, does 
not make the contract any less certain as to whom payment 
is to be made, but it gives to the instrument higher value 
by making it negotiable. Negotiable in the commercial 
sense means transferable ; a negotiable note is one which 
may be transferred from one person to another by such 
act or writing as is necessary to give evidence of the right 
of the person presenting it to receive payment. The inser- 
tion of the words ' ' or bearer ' ' instead of "or order ' ' effects 
the same end. This makes the note negotiable without 
assignment or indorsement ; nothing need be added to it 
to show title or a right in the one presenting it to receive 
payment. A note that has no such words as "or order" or 



FUNDS BY COMMERCIAL CREDIT 121 

"or bearer" added after the name of the payee, but on its 
face makes the money promised payable to a definite per- 
son, is not transferable and is non-negotiable. 



New York City, July 5, 1921. 

One year from date I promise to pay to John P. 
Larkin, or bearer, the sum of Two Hundred Fifty 
Dollars, gold coin of the United States of present 
weight and fineness, at the Chemical National Bank. 

Charles 0. Pastorius. 



Fig. 51. — Negotiable by Delivery. 

As to words of promise. — The promise clause contains 
the essence of the agreement, and though it may take any 
form of expression, the meaning must be an unconditional 



$2,346.00 

We jointly and severally promise to pay to the 
United States Trust Company of St. Paul, Minnesota, 
the sum of Two Thousand Three Hundred and Forty- 
Six Dollars, on the tenth day of December, 1921, with 
interest thereon at the legal rate till paid. 

George P. Austin - . 

Marshall Mehan. 

Alonzo Porter. 

St. Paul, Minnesota, September 10, 1921. 



Fig. 52. — Note, Joint and Several. 

obligation on the part of the makers to pay a definite sum 
of money. In case there be more than one maker, the ex- 
pression "we promise," or "we jointly promise, " means 



122 FUNDS AND THEIR USES 

that each of the makers agrees to pay a certain proportion 
of the amount of money named; while "we jointly and 
severally promise" means that each one of the makers will 
pay the whole amount if the others fail to pay their pro- 
portion. The promise clause may be simply a promise to 
pay an amount stated at a given time. In this case no 



$50.00. Peoria, Illinois, January 27, 1921. 

On the 27th day of July, 1921, I promise to pay to 
Jacob Straussner, or order, the sum of Fifty Dollars, 
at his office, No. 234 Main Street, with interest at the 
rate of 6 per cent, after maturity, the same being for 
an instalment of interest due on that day upon my 
principal promissory note, of even date herewith, 
payable to Jacob Straussner, or order, three years 
after this date for the sum of Two Thousand Dol- 
lars ($2,000). _ _ _ 

L. B. French. 



Fig. 53. — Interest Note. 

other amount may be collected at that time. But that part 
of the contract which contains the promise is usually in 
two clauses: the one contains a promise to pay a definite 
amount called the "principal" sum, and the other states 
a second proportionate sum to be paid as "interest." This 
later claim is sometimes in words which require a mathe- 
matical computation in order to determine the amount 
due. The principal, however, must always be a fixed sum ; 
otherwise the amount of interest may not be determined, 
and any uncertainty as to the amount due would destroy 
its character as a promissory note. Sometimes the addi- 
tional sum, called "interest," is made the consideration 
for a separate note, in which case the interest sum appears 
as a definitely determined amount. A contract made pay- 



FUNDS BY COMMERCIAL CREDIT 123 

able in anything but money is a form of obligation that 
would be enforced, but it would not be a "promissory 
note " ; it would not pass as commercial paper. Such con- 
tracts are common in the market-place, but they are not 
usually made negotiable, and would not be called "credit 
instruments." They are not in any wise treated as such. 
As to date of making a wofe.— The date of making and 
issuing a note has a double significance. In the first place, 
it is the common custom to make a note payable a certain 
number of days or months after date, though some bankers 
and business men now consider it better form to draw 
notes and time drafts payable at a certain time stated in 
the instrument, as, "On the 10th of March, 1921, I promise 
to pay." In this case a date of making is not necessary. 
In the second place, the date of the note may affect its 
validity. In most Christian countries a note made and 
issued on Sunday is void. The date of maturity is the day 
on which a note becomes legally due — the day on which 
the payee has a right to demand the money promised. The 
date of maturity can not be left indefinite ; no doubt must 



$25.00 Stokesville, Montana, June 20, 1921. 

I hereby promise to pay to the Stokesville National 

Bank the sum of Twenty-Five Dollars, three months 

from date, interest at one per cent per month, without 

grace, the usual three days of grace being hereby 

specificially waived by me. x T 

Lawrence Logan. 



Fig. 54. — ISote With Waiver of Grace. 

be left as to the time when demand for payment may be 
made. In finding the date of maturity it is important to 
remember that when a note is drawn "days after date" 
the actual days must be counted, and when drawn "months 



124 FUNDS AND THEIR USES 

after date" the time is reckoned by months. At common 
law a note is not legally due till three days after the expira- 
tion of the specified time. These are called "days of 
grace." The party making a note may waive the right to 
days of grace by express contract in the instrument itself. 
Some jurisdictions have made this unnecessary by statu- 
tory enactment. Where "days of grace" are abolished by 
statute the note falls due on the day stated in the contract. 

As to signature. — The maker's signature must appear in 
some form upon some part of a promissory note. It usually 
appears immediately after the written promise, though it 
may be placed on any part of the instrument and still bind 
him to the performance. It need not be affixed by him- 
self, however; signature may be made by any authorized 
attorney or agent. It may be the full name or only the 
initials. The usual business signature should be used as 
a matter of avoiding doubt or question. 

A "mark" signature. — When a man who cannot write 



L» 



eju^x 






Fig. 55. — Signature of Illiterate. 

is asked to sign a note or other legal instrument, the usual 
custom is for someone else who can write a legible hand 
to inscribe his name. This should be so written as to leave 
space in the written line for a cross. After explaining the 
nature of the instrument the signer or maker is asked to 
place a cross in the space left, as shown in the exhibit. 



FUNDS BY COMMERCIAL CREDIT 125 

Above and below the cross, and in the presence of the 

his 

signer, is written X Such a signature should also be 

mark. 

witnessed. A witness is essential for the reason that the 
signer may afterward deny that he executed the contract. 

Non-essential clauses. — Aside from the essential parts, 
there are various clauses added from custom or local prac- 
tice that do not affect its validity nor add to its obligations. 

"Value received." — One of the most frequent of these 
is the phrase "for value received." Thousands of good 
notes made without any value consideration stated in the 

frm* — ffi^4iL^4__yja 




^/s?rdM/s? f Vvw >a JU 






iS//&jfa^fc 



rxUrSu i U*>-x^q^Jt^C 



y7//-\Lx faa^te^ * 1/U^di /luu^L 




u^+^zl 



Fig. 56. — Note Drawn to "Myself" Requiring Indorsement 
to Make It Transferable. 

instruments themselves are handled daily. Notes contain- 
ing this phrase are an old form of written evidence of the 
credit contract ; the newer forms drop this wording. 

"Without defalcation." — In Pennsylvania the words 
"without defalcation" are inserted. This is wholly super- 
fluous. 

"Credit the drawer." — "Credit the drawer" is some- 
times inserted in the lower left-hand corner with the signa- 
ture of the payee. The manner of using such a note is as 
follows : Leander Jones wishes to borrow $100 from James 
Thompson. For this he offers his note for the amount de- 
sired. The note is executed in regular form. Instead of 
Thompson giving to Jones the money, or his check for 



126 FUNDS AND THEIR USES 

$100, however, he writes on its face, ' ' Credit the drawer, ' ' 
and indorses it. Jones then takes, the note to his bank 
and exchanges it for a bank account in the same manner 
as if Thompson had given his check. This form of note 
is also used to evade the " married woman" clause of the 
law, which prohibits contracts of surety and indorsement. 
John Patterson, the husband of Augusta Patterson, wishes 




$30@£l_ Bethlehem, Pa. t ^SpfMMhi^./t. i ^.190/L 

„^tt*** ! *s^^..-:*-...,'?r. — *-..i.days after date J— promt w u. 

Pay to the order of ~t <:j /¥?*<*22*<***4 , i£^ 

Jtyejfirst |\!atioi)al BapK of Bettyletyem. 

g*tel.!!/ ^lL.: -. ^ .j r Dot tn is. 

without, defalcation for value received 

Credit the Drawer 




Fig. 57. — "Credit the Drawer" Note. 

to obtain funds on the credit of his wife. He therefore 
executes his note to her. She enters on its face, ' ' Credit 
the drawer, ' ' and then indorses it. This allows John to 
obtain the funds needed by discounting it. Ostensibly John 
is the maker of the note ; in reality it is Augusta that is 
the responsible party. 

Another peculiar use of this form of note is given on 
page 127. A number of parties are commonly interested in 
raising funds. They arrange for accommodation by co- 
signature. The names of all the parties who are to sign 
are entered on a marginal slip, with the understanding 
that the note will not be complete till all have signed, it 
being understood that each is to become responsible for a 
pro rata only. The first to sign is understood to be the 
drawer, while all the others are accommodation signers. 

Parts of note containing contracts of security. — The 
parts of a note containing contracts of security for pay- 



FUNDS BY COMMERCIAL CREDIT 



127 



Date, 



Amount, $ 
Time 



Due 



Discount . . . Days ... $ 
Renewal of $ 



Leonard Grafton. 
Hiram Hadley. 
Peter Mclntyre Brown. 
Tyson & Mowbry. 
William A. Custard. 
L. A. Marks. 
Latshaw Grocery Co. 
J. B. Samuelson. 



O 



E. Browning. 
Alonzo Parkinson. 
Uriah Lundy. 

P. B. Cornlee. 

Accommodation "Credit the Drawer'' Note 



$ # # , t Reading, Pennsylvania. 

We, the undersigned, promise 
to pay to The Garden City 
Steam Paper and Box Manu- 
facturing Co., or order, .... 
month after date, the sum of 

Dollars, 

without defalcation for value re- 
ceived at the Keystone Na- 
tional Bank of Reading, Pa. 
It is understood and agreed, 
however, that the liability of the 
subscribers hereto is limited in 
such manner that each shall be 
obligated only to pay such an 
amount thereof as is ascertained 
by dividing the whole amount 
of the note by the number of 
subscribers. 

[Signed] 
Credit the Drawer. 
The Garden City Steam 
Paper and Box Manu- 
facturing Co. 

Treas 



a 



128 FUNDS AND THEIR USES 

ment when due (expressed or implied) are found: (1) In 
its signatures of accommodation, indorsement, or guaran- 
tee — i. e., in contracts for personal security. (2) In its 
special clauses carrying transfers of collateral, powers to 
enter judgment by confession, without action, rights to 
levy execution, etc. — i. e., in contracts for lien security. 

Personal security — Accommodation signature. — An 
accommodation signature is given as security for the pay- 
ment of a note by one having no interest in the funds ob- 
tained by means of the instrument sold. For example, 
one may apply at a bank for a loan. He offers his note 
for $105 (principal and interest), due one year hence, in 
exchange for $100 in cash. The banker refuses to take the 
note at that price, and the one offering it does not care to 
sell it for less. He has a friend with him, and the banker 
offers to give $100 for the note if the friend acompanying 
him will become an "accommodation signer." His friend 
agrees, and the trade is made. In form the note is a joint 
one — in fact, it is "accommodation paper." The maker's 
friend becomes jointly liable with him for the payment of 
the note, but his obligation is purely one of "accommoda- 
tion" — that is, the value of his credit (of his ability and 
integrity) is added to the principal maker's as security to 
the banker for the payment of the sum contracted for. 

Indorsement. — Indorsement is another form of contract 
of security. Samuel Johnson is owner of a note or con- 
tract made, whereby Alonzo Grey agrees to deliver $1,000 
to the order of Samuel Johnson one month after June 17th. 
Johnson takes the note to a "commercial paper man" and 
offers to sell it for $995 — i. e., he offers six per cent dis- 
count as an inducement to purchase. The dealer, how- 
ever, does not know Alonzo Grey, and is not willing to 
purchase his contract to pay without security. He is will- 
ing to purchase Johnson's credit, however, at the price 
offered. He therefore proposes that he will give the 



FUNDS BY COMMERCIAL CREDIT 



129 



amount asked for the note provided Johnson will indorse 
it — write his name across the back. When a note is made 




— '• ■ J 



f/OOOSR. BetlUehem. Pa^Oi^t^U /j£L /go/ 

(£%■%*& 2**^7-£ZA — *< Waj ' t a/let dale ...yr._. promise h 



Pay to the order of , 



THE FIRST NATIONAL BAM OF BETHLEHEM. 

_-^jr^Ol^^*^Jba!<^^ L '^ L_..- * - _. - r. ~ r ..— : I " ^v - . ... ^Dollar* 



■without defalcation for value received. 




f O 1DDRESS 



Fig. 58. — "Pay to the Order of" Note. 

payable "to order," the writing of the name of the payee 
across the back performs two services. In the first place, 
this is necessary in order to assign or transfer the right to 
receive payment; a note which is made payable "to 
bearer," however, needs no assignment, and indorsement 
is not necessary for this purpose. In the second place, 
•■the "indorsement" is a ^\ „ 

contract of security— it <S^W^> /Cjity atjfa, rfr 
carries with it an implied . // /y 

promise of the indorser (//> /J u 

that he will pay the A***^ W- ^Qff 
amount promised on the /+ n A a U 

day it is due, if the 
maker fails to do so. In- 
dorsement is usually 
made in blank — that is 
to say, without the words 
"Pay to the order of." 
The purchaser of the 
note is then free to pass 
it on from hand to hand without further assignment. In 
such case, further indorsement could be for security only. 




7 ^^1 



s>xs 

Fig. 59- 



y b**£^-t4/L**A* , 



Indorsement "Without 
Recourse." 



130 



FUNDS AND THEIR USES 



Without recourse. — If the owner of a note wishes simply 
to assign it — that is, to transfer the right to receive pay- 
ment from the maker, without also becoming responsible 
for the fulfilment of the promise 
— this may be done by adding {^ . l£> 

the words "without recourse. " * \A^A^tn^^ 

The effect of this is to deprive 
the indorsement of its character 
as security. Release from liabil- 
ity on contract of indorsement 
after it is made may be by sepa- 
rate agreement. 

Guarantee of note. — One may 
guarantee the payment of a note 
without indorsing it — i. e., by 
entering into an additional writ- 
ten contract. If there has been 
any advantage gained, any new 
consideration passed at the time 
such guarantee is made, the con- 
tract will be valid and the guarantor may be held for its 
payment. Without consideration the guarantee is void. 



/fa*. 

Fig. 60. — Indorsed Guar- 
antee of Note. 



F 01i VALVE 'RECEIVE®. — hereby guarantee the prompt payment, at maturity, 

of the following described note . executed under seal — 



and endorsed by ,• and hold. 



Jtbound by this guarantee and endorsement, the 



same as though such note were not executed under seal. 



l8q 



Fig. 61. — Detached Guarantee of Note. 






FUNDS BY COMMERCIAL CREDIT 



131 



The guarantee is usually in form of a separate writing and 
not made upon the note itself. 

Collateral note. — It often happens that it is of mutual 
advantage to pledge " collateral securities" (stocks, bonds, 
or mortgages) for the payment of a loan instead of asking 
personal security or executing a mortgage. This is done 
by offering a regular promissory note, to which a con- 




^N> 



& 8? s? 8 a ■ js ■ 

.1 i : i 1 1 s 5 

-" - « " £ •& u 
« = .9 T3 2 -c ja 

•■.-§■&«, 

.2 S « ^ 1* 5 5 

E?2? *-o S3 

* 8 *,g J -3 -3 
a -a w u 



Fig. 62. — "Iron Clad' Collateral Note 



132 FUNDS AND THEIR USES 

tract is added setting forth the ''securities" delivered and 
the conditions attached to their delivery. The one grant- 
ing the loan will hold these securities subject to the agree- 
ment. In case the contract for payment is not fulfilled, 
the contract of security may be relied on and strictly 
enforced. These contracts of collateral lien security have 



The Bank, Pa. 

Has this day of. - advanced to 

the sum of __ 

Dollars, collaterally secured, being entitled to demand o 



return of the said amount, with interest at the rate of , per cent per annun* 

on demand. Collaterals deposited herewith fisted on back of this note. 



m>u><i> to ^ Castutr. 

Fig. 63. — Collateral Note With Memorandum on Back. 



many forms. The one given on page 131, it will be noticed, 
authorizes and empowers "the holder of this promissory 
note (provided the same is not paid at maturity) to sell at 
auction or private sale, and transfer, without further refer- 
ence or notice," to the maker of the note, "and apply the 
proceeds in payment" of the note, "together with interest 
charges incurred thereon." Provision is also made for 
the disposition of the surplus. This contract, together with 
the property on which it constitutes a lien, serves as se- 
curity to the purchaser of the credit promise and thereby 
increases its value. It enables the seller of credit to ob- 
tain a higher price for it in the market. 

Memorandum collateral note. — The form of note shown 
above was largely used by banks making call-loans to cus- 
tomers during the time that the stamp revenue act was 
in force. It was thought to contain no promise, therefore, 
to avoid the necessity of paying the stamp-tax imposed on 
promissory notes. In form it is simply a memorandum 






FUNDS BY COMMERCIAL CREDIT 133 

made by the cashier to the effect that the bank had ad- 
vanced a certain amount of funds to the customer for which 
certain collateral had been deposited. The memorandum 
was then marked "0. K." or ''Correct" by the customer 
over his signature. This constituted an "account settled," 
and was enforceable at law as an instrument of collection. 
Had the revenue officers brought this form of instrument 
before the courts it is highly probable that for the pur- 
pose of the act it would have been declared an evasion of 
the tax. 

Judgment note. — Added to the ordinary form of note 
of promise for the future delivery of money is often found 
a clause in the nature of a confession of judgment for the 
principal amount, with interest, and cost of suit. 



$250.00. Jacksboro, Tennessee, May 1, 1921. 

One year after date, for value received, I promise 
to pay to Jonas Greer, or bearer, Two Hundred Fifty 
Dollars, with interest, without defalcation or stay of 
judgment. AncV I do hereby confess judgment for 
the above sum with interest and cost of suit, a release 
of all errors and waiver of all rights to inquisition 
and appeal, and to the benefit of all laws exempting 
property, real or personal, from levy and sale. 

Peter Van Dyke. 



Fig. 64. — Judgment Note With Power of Attorney. 

Judgment note with power of attorney. — Another form 
of judgment note is one authorizing someone to act as 
attorney for the maker — to appear and confess judgment 
for the amount due in case of default. The effect of this 
contract is to allow the holder, at any time after the note 
is due, to enter judgment and to seize upon any property 



134 



FUNDS AND THEIR USES 



of the debtor by process of execution, thus securing a 
lien upon any and all property found that may be neces- 



r 



JiMi 



V^^o^-^tii^o <r>c4^_: : 2 ^...."r^-rr^r- .'..__"_ !.„.„_. _" ' .*at /£* 

X _ _ HOME NATIONAL BANK ot Royersiord, Fa. 






WITHOUT DEFALCATION. VALUE RECEIVED; And do bereoy authorise any AUo 
elacwbere. to enter ana con feu Judgment for the aDoveium. with cojuof «uu And etiorn. 
errors. »od without nifty uf execution, inddowmwine right and oeoefit of Any \k\* of i his 
from aale. and K levy ti made on land, oo also waiv« toe ngu oi Inquisition, and cuu 

lima on flcri facias, with release of e 



ey oftbi* County, or any other County in tots Stale or 
s commission of rtve par cent, for collection. re > cam of 
any otner State, enemptlng property, re«J or personal. 
""sof, with full HOcrcy to tell the' 




Fig. 65. — Note With Power of Attorney Given to Confess 

Judgment. 



sary to satisfy the amount of the contract. It is a very 
severe form of agreement by way of security, and some 
States on this account have made it illegal for reasons of 



J£y4£ Tnm^ ^ el ^ J 



^. ....... Atemiba toAau 

to tie 0u/et </.. /n-c£^'&^ $jk^^£.<?.^ 

.../%--... 2t.U^ .<3?^>^ c r4^r<..^. r. . > 

for Value received, without Defalcation. And with the foregoing Obligation J bav*. delivered to aald 

as collateral security for the payment of thi tame on the day It becomes due. which collateral* ■/ hereby authorise and empower the holder of this Pro- 
rolitory Note (provided the same be not paid at maturity) to tell and trantfer at public or private sale, without further notice or reference >o ^*^C and to 
apply the proceed* in psyment thereof, together with interest and charges incurred thereon. thereafter, snould any deficiency remmn unpaia. J further 
promise and agree to pay the same to the holder hereof on demand And 1 do hereby confess Judgment for the said sum, with interest, leas the amount 
obtained from any such sale of iuch collaterals, prior to the entry of record of said judgment, waiving the ffenefit of all law* exempting real or personal property 
from kvy and sale, Inqulsitloo and condemnation; and should an execution be lyued hereby ague that an attorney's commission o</?\. T*4? L pet cent, 
•hall be charged, and do hereby agree that this Note maybe entered of record ^A- 7>t c<TVv£( after such lair of said collaterals, or of any portion 

thereof, u herein provided for. " y /J L j& /' ' jf 



Fig. 66. — Collateral Judgment Note. 



public policy. The above form is unusual in that it' 
combines a contract of collateral security with one giving 



FUNDS BY COMMERCIAL CREDIT 135 

power to enter judgment without action for any deficiency 
on sale of collateral. 

Presentation for payment. — A promissory note per- 
forms a double purpose as a funding instrument: (1) It 
is a form of instrument which allows the maker of the 
note to dispose of his credit in exchange for funds. (2) As 
a contract for the future delivery it is an instrument in 
the hands of the holder by means of which he may obtain 
funds through sale or through payment (the delivery of 
the funds promised). It is this second use that we still 
have to consider. Payment is obtained through presenta- 
tion, and depends as much on the punctuality of the holder 
as on the punctuality of the maker. A note should be pre- 
sented on the exact day of maturity. When made pay- 
able at a bank, or at any other place, notes must be pre- 
sented for payment at the place named. If no place is 
specified, a note should be presented at the maker's place 
of business or at his residence. The fact that a note is not 
presented on the day of maturity does not affect the obli- 
gation as between maker and payee ; but unless there is an 
express waiver of rights, the note must be presented upon 
the exact day of maturity if the indorsers and guarantors 
are to be held liable under these contracts. 

Part payment. — A maker may usually pay a part of his 
obligation before it is due. It often happens that it is not 
convenient to pay the whole amount when due, in which 
case the holder may take a part and grant an extension 
of time on the balance. This is in reality a new contract. 
If a part payment is made, such payment should be in- 
dorsed on the back of the note. Indorsement of this kind 
requires no signature ; the usual form is, ' ' Received on 
within note," stating the amount and date of payment. 
An ordinary separate receipt does not give notice to a 
purchaser that a payment has been made. A receipt in- 
dorsed on the back reduces the face of the note. Only pay- 



136 FUNDS AND THEIR USES 

ment of the obligation in full — i. e., payment of the exact 
amount of money promised — will satisfy its conditions, 
unless the payee enters into a new contract whereby he 
agrees to accept something else in place of the money. For 
example, suppose the maker's check were accepted. 
Usually, acceptance of a check and the surrender of the 
note constitutes a new agreement whereby the payee re- 
linquishes his right to receive the amount of money prom- 
ised ; the consideration for the relinquishment or cancella- 
tion of the contract is an order on the bank to transfer 
funds from the account of the maker of the check to the 
one surrendering the note. Such a settlement is what is 
called an " accord and satisfaction" between the parties. 

Legal tender. — If there is a controversy as to the amount 
to be paid, the maker may offer (i. e., he may make a 
tender of) such an amount of money as he may think due. 
If this is refused, and a court to whom the controversy is 
referred decides that the correct amount of money has 
been tendered, the maker will be entirely released. If, 
again, the dispute be with regard to the kind of money 
offered, the maker need only offer that which by law is 
made "legal tender" for the payment of debts. In the 
United States gold and gold certificates are "legal tender" 
money to any amount and for every purpose in the satis- 
faction of credit contracts, unless some other kind of 
money is specified in the agreement ; in such case, the kind 
promised must be delivered if the creditor insists. 1 

Non-payment of note. — It often happens that there is 
a failure and refusal on the part of the maker to meet his 
promises. He may have refused payment because he was 
unable to secure the necessary funds; he may dispute the 
amount claimed on the ground of failure on the part of 
the payee to indorse a part payment already made, or for 

i Silver coins, certificates, greenbacks, Federal Reserve notes, Fed- 
eral Reserve bank-notes, are limited "legal tender." 



FUNDS BY COMMERCIAL CREDIT 137 

some other reason ; he may seek to avoid his debt. In any 
case, the fact of failure and refusal gives to the payee a 
"right of action" in the courts not only against the maker, 
but also against all "cosigners," "indorsers, " and "guar- 
antors," to compel them to make payment of the money 
promised and for which they became surety. 



New York, 1921. 

To 

You are hereby notified that a certain note made by 

for $ 

in favor of 

dated , and by you indorsed (or 

guaranteed), was this day presented to 

for payment and payment was refused. 

[Signed] 



Fig. 67. — Notice of Non-Payment. 

Notice of non-payment. — The holder of a note which 
has been indorsed, or the payment of which has been guar- 
anteed, must notify the indorser or guarantor if payment 
is not made when due. When one becomes surety for the 
fulfilment of another's credit contract, he is entitled to 
know of the non-payment in order that he may take steps 
to protect himself. If he receives no notice of non-pay- 
ment he has a right to presume that the contract has been 
met and that he is released from the security. Above is 
shown the usual form of written notice sent. 

Waiver of demand and notice. — This right to have 
demand made on the day that the note is due and to notice 
of non-payment, however, may be waived by indorsers and 
guarantors at the time the contract is entered into. ' ' Call- 
loan" notes and many of the "short-time" notes taken by 
banks very commonly have a clause in the instrument of 



138 FUNDS AND THEIR USES 

this kind. The law simply protects the indorser in case he 
does not sign away his rights. When waiver is made the 
contract may be strictly enforced by a bona-fide holder. 



$500. Logansport, Indiana, June 30, 1921. 

We, or either of ns, promise to pay to the order of 
John Hartwell Bates, on July 30, 1921, the sum of 
Five Hundred Dollars, with interest at the rate of 
6 per cent from date, for value received. 

And the cosigners and guarantors of the above note 
hereby severally and specifically waive all rights and 
exemptions that would accrue, for failure of the 
holder to present this note for payment when due, for 
notice of non-payment, notice of protest and of de- 
mand upon them for payments, in case this waiver 
and exemption had not been specifically made. 

Louis Stranger. 
Peter Longfellow. 
John R. Crandall. 



Fig. 68. — Note With Waiver of Notice on Non-Payment. 

Protest. — An indorsed or guaranteed note which is pre- 
sented for payment outside of the jurisdiction in which it 
is made, and is not paid, is usually protested; this is done 
to give formal evidence that the note was presented for 
payment and that payment was refused. Protest is a for- 
mal declaration made by a notary public into whose hands 
a note has been placed for official and formal presenta- 
tion, together with a formal record of the fact by the 
notary. The notary usually attaches the certificate of pro- 
test to the note; he may also mark upon the face of the 
note the fact of its dishonor. When a note is sent to a 
bank or other agent for presentation and collection, the 
greatest precaution must be taken before protest ; the bank 



FUNDS BY COMMERCIAL CREDIT 139 

or other agent should never have it put into the hands of 
a notary for official presentation and protest until it is 
made certain that the non-payment has not occurred 



SO /) ~£& 

■3^ BetMehem, Pa.AJj^^Ji./yrr^-T.. 

qs W -idA^S:-^i!iZ«ruC!Z<^.^p^. day* after dale. 
Pay to the or** <£.Jted!i&3ft8ak^^ 



$JM-&£>*£:~ W% BetMehem, Pa.AJtulAA. //<&— tgof 

d*ty& after date...SJ...~..promi$e la 



?...„.. at 



6^**, 



THE IffiT NATIONS BANK OP BETHLEHEM, 




„«_»-- - J ._.. Dollars, 

'Urn ^ 



without defalggfoi^for value received. 

£ e 




r.0.«00l£S3> 



Fig. 69. — Protested Note. 



through mistake ; usually a messenger will be sent out with 
the note to the maker to make formal demand before turn- 



Philadelphia, l.idh (JL 190/ 




At the request of the Holder. 

Zhe Centennial IRatfonal Bank 

X the undersigned, Notary Public for the Commonwealth of Penna. 

have this day protested a ^/L.Q^^r ......* ^for $JQQP, 

dated yfe^../^..... 190/. drawn hy...JT..^M^....^X4.!h 

(the same being due, demanded and refused), and you as endorser, will 
be looked to for payment, of which you hereby have notice. 

D. S. LINDSAY. Real Estate Broker. 

ja^Please notffy the other parties No. 14 South Broad Street 

Fig. 70. — Notakial Notice of Non-Payment. 

ing it over to a notary, even though the note is made pay- 
able at the bank. For self-protection, banks make it a rule 
to protest all paper received from another State for collec- 



140 FUNDS AND THEIR USES 

tion which is not paid when due, unless ordered not to do 
so by the owner ; one wishing not to have protest made 



DC T TKTT^C A "V 1 NOTARY PUB c - ) No. 14 South Broad Street, 

. O. LI1N UoA I , I REAL EST..TE iROKER, | RothsotUld Bui 



lding. 



^nilcd J&iatcs of ^m^rica 

<COPY) 

&»* * o.^t£ a/&; **& J/>„r»u*-£-/z 2 -&- 



BE IT KNOWN, That on the day of the date hereof, at the request of THE CENTENNIAL 
NAT. BANK, the holder of the original 'Kg^CZ of which a true copy is above written. I, the 

undersigned, Notary Public-for the Commonwealth of Pennsylvania, by lawful authority duly commissioned by 
the Governor Of Penna., and sworn, residing in the .City of Philadelphia, during the usual hours of 
business for such purposes, caused the same to be presented at ^i\j, 31/yv/^ 1\£jtLa^, ^ &ffj y 

and demand made for the payment thereof, which was refused and answer made 

Whereupon, J, the said Notary, at the request- aforesaid, have Protested, and do hereby solemnly 
Protest, against all persons and every party concerned therein, whether as Maker, Drawer, Drawee, Acceptor, 
Payer, Endorser, Guarantee, Surety, or otherwise howsoever against whom it is proper to protest, for all Ex- 
change, Re-exchange, Costs, Damages and Interest suffered and to be suffered for want of payment thereof: — Of 
which" demand and refusal I have duly notified the parties interested. 

ILjr Thus done and Protested at the City of Philadelphia, 

the JJ%- dayof A^A, ffC/ 




Notary PufiKc 



Fig. 71. — Notarial Certificate of Protest. 

should instruct the bank to that effect. Such instructions 
are commonly attached to the left end of a note form, with 



FUNDS BY COMMERCIAL CREDIT 141 

the injunction that the instruction is to be clipped off be- 
fore presentation. 

Notice of protest. — It will be observed that the notice 
of protest is sent out by the notary public, to the maker 
of the note and to each of its indorsers and guarantors, 
making formal and official demand. The form of notice 
used in Pennsylvania is given on page 140. 

Advantages and disadvantages of using promissory 
notes. — All forms of credit are contracts for the future 
delivery of money which have been "sold" or exchanged 
for something else of value. That which is received in 
exchange or "paid" for a credit contract is called the 
"consideration" or price. A promissory note, as a form 
of credit contract, has the advantage of being a formal 
agreement expressed in writing and signed by the party 
making it, as well as by the ones indorsing or guaranteeing 
it. It is therefore less likely to be disputed, and more 
likely to be complied with than is a simple verbal promise, 
for which there is no written evidence, or a memorandum 
of account made by the creditor and not signed by the 
promisor. Being a written agreement also, it may be pro- 
tested; such public dishonor is likely to injure the credit 
of the maker and cause his future offers of credit to be less 
salable ; on this account the maker will usually be more 
prompt. The disadvantages of a promissory note are found 
in the fact that delivery may not be enforced till the note 
is due. The only way that the holder can obtain funds on 
a note not due is to sell it again. When it does come due 
the maker of the contract may have sold everything that 
he owns and thus have defeated the enforcement of the 
contract. An open account, on the other hand, is due at 
any time. An overdue note (although dishonored) may 
be a better form of paper for the holder to obtain funds 
with than a note not due, because action for collection on 
an overdue note may be begun at once. But a note that 



142 FUNDS AND THEIR USES 

has been acquired after it is due is not a safe investment; 
the one holding it can not raise the plea of ''innocent pur- 
chaser" against any defense which the maker might have 
raised against the payee if it had remained in his hands. 
Suppose, for example, that the maker had made part pay- 
ment, and the holder, failing to indorse the amount, sold 
it after maturity without knowledge on the part of the pur- 
chaser that a part of the amount had been paid. In such 
case the maker would be allowed to set up the payment as 
a defense in liquidation of the amount. 

Instruments for the Collection of Credit 
Accounts 

The commercial account has already been discussed in 
its character as funds — i. e., as a form of credit used for 
the purpose of making purchases and payments. The 
promissory note, on the other hand, has been treated as a 
form of credit used to obtain funds. Both are evidences 
of contracts for the future delivery of money. The first 
contract, however, is one for which there is no evidence 
except the memoranda or memory of the parties, while the 
second is evidenced by a writing setting out the contract 
in full, signed by the party obligated. The promissory 
note, therefore, as has already been observed, serves a 
double purpose: (1) by its original sale the maker was 
able to obtain funds for his immediate use; and (2) the 
note being a signed and formally executed statement, it 
may be presented to the maker for payment; it thereby 
serves the payee for funding purposes by resale or by col- 
lection under the contract when it comes due. To restate 
the difference : The commercial account has for its end 
the purpose of serving its maker as "funds" — as means 
of purchase or payment ; the promissory note performs the 
double service of obtaining funds for present use for its 



FUNDS BY COMMERCIAL CREDIT 



143 



maker, and that of obtaining funds for future use for 
the payee. The commercial account, however, being a 
contract for the future delivery of money, must have some 
form of expression of this side of the agreement. There is 
no written evidence of the contract for payment or future 
delivery. In exchange for it goods are given $ how will 
the one who has given goods for this form of credit obtain 
money in payment under the contract? This has given 
rise to a whole class of instruments of collection. 



,, T ~ New York, July 1, 1921. 
Mr. Joseph Grayson 

To John R. Black, 

Dealer in Boots, Shoes, and Gents ' Furnishings. Dr. 


1921. 
June 


2 

2 

2 

11 

11 

28 


One pair boys ' shoes 

One pair "Rex" tan boots. . 
Two neckties. 


$1 
5 
1 
1 

8 


00 
00 
50 
00 
50 
00 

00 


1 Monarch shirt 


2 pairs black hose 


1 pair trousers 


Total, June account. . . . 


$17 



Fig. 72. — Account Stated. 



Accounts stated. — The most common instrument of col- 
lection is the account stated. This is simply a copy of the 
memorandum, or a statement from memory, of the items 
of credit and amount received in exchange. This state- 
ment is presented to the purchaser for payment. It thus 
becomes an instrument in the hands of the one receiving 
the credit, which is used to obtain funds in payment of 
the credit given in exchange and for which there is no 
other evidence. After an "account stated'' has been pre- 



144 FUNDS AND THEIR USES 

sented for payment, if no objection is made to the items 
of credit contained in it, it is taken for granted that the 
party receiving the statement accepts it as correct. 

In the exhibit on page 143 is a copy of memoranda taken 
by John R. Black in regular course of business with Mr. 
Joseph Grayson. The "account stated," or copy of his 
memorandum, shows that on June 2 Mr. Black received $1 
of Mr. Grayson's credit for a pair of boys' shoes, $5 of 
his credit for a pair of "Rex" tan boots, $1.50 of his 
credit for two neckties, etc. During the month he had re- 
ceived, according to his own account, $17 of Mr. Grayson 's 
credit in exchange for goods. He now "states" the ac- 
count of Mr. Grayson — i. e., presents a copy of memo- 
randa to him for payment. 

Accounts settled. — The fact that accounts are simply 
the memoranda of one party to the transaction leaves room 
for question as to their accuracy. For example, Mr. Gray- 
son may deny that he gave $8 of his credit for the trousers 
purchased on June 28 ; he disputes the account, claiming 
that he agreed to pay only $7.50. Mr. Black's clerk may 
recognize the mistake and correct the error, thereby re- 
ducing the account stated to $16.50. But Mr. Grayson 
prefers to have the account stand over for another month 
before payment of the amount acknowledged to be due. 
To place the account stated beyond future controversy, and 
to show that the amount due has been settled or agreed on, 
Mr. Grayson marks on the face of the statement "0. K., " 
adding his initials "J. G. " Now the "account stated" 
takes the form of a written contract for payment of $16.50. 
At the beginning of next month Mr. Black renders a new 
statement of account, in which he enters the amount 
agreed on as balance due as "balance as per account 
stated," adding the amounts of credit purchases subse- 
quent to July 1. In order to place an account beyond 
question, and at the same time to have it in form of a 



FUNDS BY COMMERCIAL CREDIT 



145 



"settled account," bills may be rendered at the time the 
purchase is made or long before the account is due; the 
party receiving it will go over the items for the purpose 



New York, August 1, 1921. 
Mr. Joseph Grayson 

To John R. Black, 
Dealer in Boots, Shoes, and Gents' Furnishings. Dr. 



July 


1 
14 
14 


Balance as per account stated. 
1 suit of clothes 


$16 

30 

5 


50 
00 


1 1 


1 Knox hat. 


00 




Amount due August 1. . 






$51 


50 



O.K.— J.G. 



Fig. 73. — Account Settled. 

of correction, and then return the memorandum with a 
statement that it is correct, or with '"O. K." marked on 
its face over the signature of the one buying on credit. 



O « - 

f- ^ 5 

uj U 05 

" =? 

£ ° § 

C/5 w -C 

2^ * 

*fc § 

(0 



IHa. 



cjfZTz).. 



Philadelphia, Jxosuxj$i&0 / 




j°ITO e Pmerieai) flcademy of political arjd Social Seiepeefp^" 

For Annua! Dues for year ending December 51, 19 O t , $5-oa 



Received payment.. 



19 



»**.„..»„ Ttoisurtt, 



Fig. 74. — Statement With Receipt. 



The account is then in form for collection when due the 
same as a promissory note. 

Accounts paid. — Accounts may be paid by the tender of 
the amount of money due, or by offer and acceptance of 



146 FUNDS AND THEIR USES 

something else, as, for example, the acceptance of a "set- 
off," a "draft" for the amount, a "check," or a "due- 
bill." The payment is very commonly evidenced by a 
"receipt," or a written statement of the fact of payment 
received. 

A set-off. — If one has a claim against another who also 
has a claim against him, this claim is called a set-off — 
that is, something to set or cancel off part of his claim. 
Under ordinary conditions it is impossible to have a set- 
off against a note not in the hands of the original payee, 
but with mutual accounts it is the common method of 
payment. 

Due-bills. — A due-bill is a written acknowledgment or 
evidence of a due account. The ordinary form of due-bill 
is not negotiable, as it is not made payable * ' to order. ' ' It 
differs from a promissory note in another particular, viz., 
that it may be made payable in merchandise. 



$51.50. New York, August 1, 1921. 

Upon settlement of account, this day, with John R. 
Black, I acknowledge the sum of Fifty-One Dol- 
lars _*2_ to be due and owing to him by me. 

100 & .7 

Joseph Grayson. 



Fig. 75. — Due-Bill. 

Commercial drafts. — A commercial draft is an instru- 
ment for the collection of funds, through a third party, due 
on account. It is in the form of a letter from the person to 
whom an account is due, directed to the party owing an ac- 
count, requesting him to pay the amount of the draft to a 
third person and to charge the same to the account of the 
writer. For example : one Jacob Ross has purchased from 
William Jones $500 worth of merchandise on account, to 



FUNDS BY COMMERCIAL CREDIT 147 

be paid on November 1, 1921. On October 30, Lawrence 
"Williams presents an "account stated" to William Jones 
for $300, and demands payment. Jones has not the 
money, but tells Williams that Ross is owing him $500 due 
on November 1. Williams thereupon offers to take a draft 
on Ross for $300 in payment of Jones's account to himself 
(Williams), which is agreed to by Jones. He thereupon 
writes to Ross as follows: 



Springfield, Massachusetts, October 30, 1921. 

To Jacob Ross: 

After November 1, please pay to Lawrence Wil- 
liams Three Hundred Dollars, and charge to the ac- 
count of 
$300.00 William Jones. 



Fig. 76. — Time Draft. 

Upon the receipt of this letter, Williams "receipts" the 
account against Jones. He presents the draft to Ross and 
receives payment ; Ross charges the amount to Jones 's ac- 
count. It will appear from this that the draft on Ross 
not only serves Williams as an instrument of collection of 
his account against Jones, but it also serves Jones as funds 
for the payment of his account to Williams. This double 
relation is always found in a draft. It is primarily an in- 
strument for the collection of funds in the hands of the 
one receiving it, but it serves the party making the draft 
as funds for the purpose of payment "on account.'' It 
often happens that a party living, let us say, in Boston, 
owes another party in New York. The New York party, 
wishing to collect the amount due on account from the 
Boston man, will "draw on him" through his bank. The 
bank's correspondent in Boston will present the draft, 



148 FUNDS AND THEIR USES 

upon the payment of which the amount will be placed to 
the account of the drawer. The New York man will be 
considered as having made a payment to his bank "on 
account" by drawing on the Boston customer who owes 
him. 

Foreign bills. — When a bill or draft is drawn on some 
one living- in a foreign country, it is usually drawn in 
duplicate or triplicate, so that in case one is lost the other 
will reach the party to whom it is addressed. This grows 
out of the increased uncertainty of delivery of a foreign 
bill. In the foreign bill, more clearly than any other, ap- 
pears the true nature of the instrument. Primarily, it is 
a simple request. It is not, when drawn, a credit instru- 
ment. Several requests may be made at the same time for 
the same funds. No promise or contract for the delivery 
of money may be found in a draft before it is presented. 
The whole credit quality of a bill depends on ' ' acceptance ' ' 
— i. e., on the undertaking of the one of whom the request 
is made to make payment to the party presenting it. The 
accompanying exhibit is the "First" of exchange, drawn 
by the Bank of the United States, January 25, 1838. This 
was one of three bills of like "tenor and date," each bear- 
ing on its face the stamp of its relation and significance. 
On the left end of the exhibit is engraved "First." Each 
of the other two had engraved upon it "Second" and 
"Third," respectively. The Bank of the United States, 
through its President, Nicholas Biddle, and its cashier, J. 
Cowperthwait, issued three bills requesting S. Laudon, of 
London, to pay to M. Robinson £1,000, and charge the same 
to the account of the drawer. This payment was requested 
"sixty days after sight" of the bill first presented. The 
"First" was presented on May 4, nearly three months 
after the three bills were drawn. During all of this time 
there had been no obligation on the part of Laudon, of 
London, to pay the amount. On that day, however, he 



FUNDS BY COMMERCIAL CREDIT 



149 



" sighted "the 
"First," and 
wrote on its 
face his ac- 
c ep t ance — 
i. e., S. Lau- 
don under- 
took to pay 
£1,000 to the 
one present- 
ing it sixty 
days hence. 
The bill at 
that moment, 
and not till 
then, became 
a credit in- 
strument — a 
promise to 
pay a definite 
sum of money 
at a definite 
time . The 
"first" re- 
quest having 
been honored, 
the accept- 
ance of either 
the "second" 
or the" third" 
would have 
been at the 
risk of the ac- 
ceptor and not 
of the drawer. 




U2 

W 

Eh 

DQ 

C 

w 

Eh 

M 

fc 



K 

EH 

fc. 

O 

W 

< 
PQ 

© 

Eh 

P3 

n 

& 

O 
Q 

O 



© 



150 FUNDS AND THEIR USES 

as the request was for the payment of £1,000 only and not 
for £3,000. 

Sight-bills and drafts. — A sight-draft is one requesting 
payment at the time that it is presented. Let us suppose 
that Louis Borg had an account against Patterson & Co., 
of Philadelphia. He wishes to pay an account to Peter 
Sterling for $500. He draws on Patterson & Co. for the 
amount payable "at sight." 

Time-draft. — A time-draft is one made payable on a 
certain day, as, for example, "on November 1," or a cer- 
tain length of time after presentation for acceptance. It 



$500. 

Pittsburgh, Pennsylvania, January 23, 1921. 

At sight pay to the order of Peter Sterling Five 
Hundred Dollars, value received, and charge to the 
account of Louis Borg. 

To Messrs. Patterson & Co. 
Philadelphia. 



Fig. 78. — Sight-Draft. 

is very common to make a draft payable ten days, or thirty 
days, "after sight." The time of payment of the draft 
is usually governed by the conditions of payment of the 
account for the collection of which it is drawn. If a bill 
of goods were payable ten days after delivery, then a 
draft might be drawn and sent at the time that the goods 
were sent, to be presented for acceptance on delivery of 
the goods, but not payable till ten days afterward. 

The acceptance of a draft, like the "O. K." of an ac- 
count, makes it a written evidence of debt against the one 
accepting it ; it is then in the nature of a promissory note, 
to which the drawer becomes the indorser, and the ac- 
ceptor is the principal party to the contract. Acceptance 



FUNDS BY COMMERCIAL CREDIT 151 

is made by writing across the face the word "Accepted," 
together with the name of the party accepting. It is 
usually dated, and very often the place where payment 
will be made is added. If the place of payment is not en- 
tered, it is payable, like a promissory note, at the office of 
the acceptor. When the one on whom the draft is drawn 
accepts it, he is said to "honor" it. If not accepted or 
paid, it is not more binding on him than a letter or oral 
request would be. His refusal to honor drafts made for 
the payment of accounts due, however, will injure his 
credit in the community — i. e., make it less salable in the 
future — and thereby will handicap him in using credit as 
capital in his business. 

Security for acceptance and payment of drafts. — A 
draft, before acceptance, is much like a promissory note 
that has been negotiated before it is executed. It is taken 
by the payee, or his assignee, on the faith or judgment 
that it will be accepted. This judgment is based on the 
contract, or contracts, of security that go with and are 
attached to or made a part of the bill at the time that it is 
drawn. As in the case of the promissory note, the con- 
tracts of security are of two kinds, viz., (1) personal se- 
curity and (2) lien security. Unlike the promissory note, 
however, the contracts of security are for both acceptance 
and for payment. In the first place, the drawer enters into 
a contract (not written, but understood and enforced by 
law) at the time that the bill is drawn by which he guaran- 
tees that the drawer will both accept it and pay the amount 
when due. To this may be added still other personal se- 
curity by "indorsement" or "guarantee." But since the 
bill is negotiated and enters the channels of trade before 
the credit contract has been executed, since it is offered 
for discount and exchange in a foreign land, personal se- 
curity may not be considered sufficient. A foreign 
exchange house will usually require that collateral or lien 



152 



FUNDS AND THEIR USES 



security be added to the contracts of personal securities. 
These collateral contracts may be offered as security for 




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Fig. 79. — Documented Bill — Invoice. 



FUNDS BY COMMERCIAL CREDIT 153 

acceptance only, or, as in case of ''sight-drafts," for both 
"acceptance" and "payment." 



9 . w 



Ho. * 

SbiPPCO, In apparent good order aojjhiondiUoo, by^^l^-^J-g^C^i***^ Jr^<d^^ board of 

the PANAMA RAIL ROAD Steamer -O'-'C-C^-^i-S^Z^i . : - - or any of the OompsayV 

8teamerg, or Steamer employed by said Company; now lying In the Port of New Tork. and bound for Colon, TJ. 9. C— To aay 



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(Contents unkrf. _ 

leave to tow and assist vessels i ...... ....... -.,..-.. 

employed by or connected with them, to lighter from 9te*mer to Steamer, and from Steamer to shore, and to touch at Port or Porte), unto 
the Port of Colo- -» ■ ■ - 



delivered to the Agent ot the PANAMA RAILROAD COMPANY, for transportation to the Port of Panama, and from thence (being light- 
ered at the risk of shippers) by Steamer or Steamers oft he PACIFIC STEAM NAVIGATION COMPANY, and or SOUTH AMERICAN 
' STKAMSHIP Q0MPASY 05 Steamer employed ny_£Kber of the said Companies, with the like exceptions, privileges and exemptions unto 



1 thePoRT - WrS^.rf..*^.4^X-^^ .and there In Ukeaaparcnt good order and condition, to bo deUvered 

I unto. .. C^£^^^^r^-^ t <^ Cac2M^£^^ _ _ 

! or bts or tneir asaigns,/r«(;ht for the same ol rotes a* per4narff.n, to be paid in iTew York in Doited States Gold Coin. 

Said lreight to be considered as earned, vessel cr canzo lost or not lost : and on the happening of any of the above-ercepted contingencies, 
the sa,d Steamship Companies are to have the right to forward the above-mentioned packages to the ports of destination on their own routes 
and shall receive extra compensation for such service, whether performed by their own vessels or those of strangers; and in case of salvage 
, services rendered t-o aforesaid merchandise or treasure, during the voyage, by vessel or vessels of said Companies, such salvage service shall be 
: paid for as fully as if such salvjug vessel or vessels belong to strangers. . - 

It is expressly understood that the articles named in this B1U of Tiding shall be taken from alongside (at ship*? tackles or gangways) by 

!' the consignee immediately after the vessel is ready' to discharge, or otherwise they may be landed at the expense and risk of the owner, shipper 
or consignee. 
• These Companies will cot be responsible for ANY DAMAGES to goods in BALES. 
BUTTER, LARD, OILS. TALLOW, Ac— The Companies mentioned in this BUI of Lading will no. be responsible for loss In weight. 
. by leakage or damage incident to the transportation of Butter, Lard, OQs and Tallow, &c, or similar goods in Steamers and through tropical 
j climates. 

1 It is expressly understood that the Companies mentioned in this Bill of Lading are not accountable for weight, leakage, breakage. 
i shrinkage, rust., loss or damage from insecurity of packages, inaccuracy or omission In marks or descriptions, effects of climate or decay, 
i sweating, beat of holds, vermin, rain or spray, nor for articles perishable In their nature, or from unavoidable detention or delay, and these 
■ Companies win not become liable for any value exceeding one hundred dollars (9100.) upon each of the above-named packages, unless the value 
I exceeds that amount and is so expressed In this Bin of Lading. 

It is expressly stipulated that a delivery on tho wharf at the'Porfc of Panama, of the goods and merchandise mentioned in tins Bit! 
j of L»dlng*accordlngto the terms thereof, to the PACIFIC STEAM NAVIGATION COMPANY, and or SOUTH AMERICAN STEAB- 
1-fiHXP COMPANY, shall absolve the PANAMA KAIL ROAD COMPANY from all claims or liabilities whatever. 

Tfc* PANAMA KAIL ROAD COMPANY win not be responsible for loss or damage to goods from fire in cars, in warehouse or on wharf. 
I Anditisfurther stipulated and agreed, that Vessels are warranted seaworthy only so far as due care in the appointment or selection of 
! Agents, Superintendents, Pilots, Masters. Officers, Engineers and Cn?w can secure it; and the Companies mentioned in this Bill of Lading will 
! not be liable for loss, detention or danaAges arising directly or indirectly from latent defects in boilers, machinery, or any part of the Vessel, 
provided all reasonable measures have been tajten to secure efficiency. 

A nd tt Is further stipulated, that In all cases of loss of such goods and merchandise, the amount of claim and damage shall be restricted to 
the cash value of such iroods or merchandise, at the port of shipment, at the time of shipment; and that all claims for partial loss or damage 
shall be ascertained and adjusted upon the same basis of value. 
Not accountable for detention at ports of transhipment. 

In case of the blockade or Interdict of the port of delivery, or if. without such blockade or Interdict, the entering of the port should 
be considered by tbc Master unsafe by reason ot dlteaxe, war or disturbance*, be Is to have the option of landing 1 be goods at any other 
port which he may consider safe, at shipper's expense and risk, and in such case the receipt of the Custom House or other port authorities to* 
be accepted by the owners or consignees as a legal and thorough cancelling of this Bill of Lading. Ail quarantined expense incurred upon 
the goods, of whatsoever nature and kind, to be paid by shippers or consignees of the goods. 
In all cases the ship's responsibility is to cease when goods have left the ships deck. 

Shippers of the goods named in this Bill of Lading must comply with all Consular Regulations for Manifests, Idrotees, Certificates, etc; 
and any fine Imposed by Authorities at port of Destination, or damage resulttn? from the failure in this respect, or for Error* or Omtssiona 
therein, shall be at risk and expense of toe consignees of Goods, and shall be paid by them. 

The s Ud Goods or Merchandise are shipped and received upon the conditions of the stipulations and prov felons hereinbefore- expressed. 
the undersigned undertaking in behalf of the said parties, severally, and to the extent only, of the liabilities hereiostated to be assumed by 
each of them respectively. / 

111 WLitnCSB UWbCrCOf, the Agent of said Steamer baihslgned. .Mf^fr^^&S^Z. Bill* of Lading, si of this 

tenor and dare, one whereof being ac^omplishedy the ethers are to stand void. j "^^V7 

Dat«d at New York, this .*fL_^t^2-rfft^- - da *' ** -- ^AA^>&-&dL. 5L^?_S^ 

.._ „ ... r / _ Shipper*. . . „ ..y^t^/.J^^LC^^^ 

YortksA MA RAIL ROAD COMPANY, 
PACIFIC STEAM NAVIGATION COMPANY. - 
or SOUTH AMERICAN STEAMSHIP COMPANY. 



Fig. 80. — Documented Bill — Bill of Lading. 

A documented bill. — A draft thus secured is called a 
"documented bill." The exhibit here offered is of such a 
bill "secured of exchange," drawn by Burnham, Williams 
& Co.. of Philadelphia, on the Peruvian Corporation, Ltd. 



PREMIUM AND LOSS PA 



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MORGAN, UAR.1ES & CO.. Pat 
GTSBRUDER SCHICEXER, Be.-: 
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A. C. FUASBR & CO., RottcrdJ 
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155 



The Baldwin 
Locomotive 
Works had sold 
a consignment of 
machinery to the 
Peruvian Cor- 
poration. At the 
time the goods 
were shipped, 
invoices were 
taken to the of- 
fice of the Pana- 
ma Railroad Co., 
and bills of lad- 
ing were taken 
out by Burn- 
ham, Williams & 
Co. in favor of 
thems elves — 
i.e., they shipped 
the consignment 
by the steamer 
Orizaba to their 
own order, and 
had five copies of 
the bill of lading 
made out. At the 
same time dupli- 
cate ninety-day 
drafts were 
drawn, and an 
insurance policy 
was purchased 
from Lloyds to 
protect the 




156 FUNDS AND THEIR USES 

property against loss. These — the invoices, the bills of 
lading, the insurance policy, and the two drafts — were 
taken to Brown Brothers & Co. for discount. Satisfactory 
arrangements having been made for the sale of the bills, 
Burnham, Williams & Co. indorsed and assigned them all 
over to Brown Brothers & Co. ; that is, they executed a 
contract or bill of sale to Brown Brothers & Co., with 
instructions "that if the said bill be accepted, the bills of 
lading are to be given up to the Peruvian Corporation, 
Ltd., without prejudice," but "if the Peruvian Corpora- 
tion, Ltd., declines to accept," then Brown Brothers & Co. 







MAY 9 - 1902 _J#/?_ 



. ..fa^fr '1j,/A,t 0&L*.j*** .WT^"— ?>. s/s/r/:. MAY 9 -1902 

'//#■: J'o?<$J. y'O ,//st/;s/ys/yw/ f j/s/jflifa,s/>.SYj/ 0C*^r»<^*- A.~^r- 

/r/r y//<s /,//// /s? S/te.^ \Jg /^«^^U &<rrpfc^/L.Jr, A /&/ r ,/x&$*ifc^#&ctath!&ir, 

£ s// ?■} /r-//r/->f/>yf</y////v// //{/&<• /;/&/&?, Ys<r<7s////y'' ////tv//.// s//(/y <irfr/?//, 

^M-urJ. ?fswesyi'//<fy, 



Fig. 83. — Documented Bill — Advice of Sale of Draft. 

were authorized to retain the bill of lading and to 
place the said material at any time in the hands of 
their brokers for sale at their discretion, and to charge 
all expenses, including commissions for sale and guar- 
anty, and to apply the proceeds on or toward payment 
of the draft for account of whom it may concern. In 



FUNDS BY COMMERCIAL CREDIT 157 

negotiating a documented bill, it is necessary that all copies 
of drafts and documents be turned over to the party buy- 
ing it, otherwise a stranger having duplicates might fore- 
stall the owner and defraud the parties in interest. It is 
to be noted that the collateral here given was in the nature 
of security for "acceptance," only. After acceptance, the 
only contracts remaining were the credit contract, or prom- 
ise to pay on the part of the Peruvian Corporation, Ltd., 
and the personal security of Burnham, Williams & Co. and 
their indorsers for payment of the credit contract ninety 
days after acceptance. The indorsements and other collat- 
eral contracts of security attached to drafts make these 
instruments of high commercial value. In the negotiating 
of foreign bills, such precautions are taken that one house 
doing several millions of this kind of business per annum 
has the phenomenal record of having lost only $600 during 
forty years of dealing. 

Secured drafts used as funds. — By sale of his draft 
on New York, the St. Louis merchant is enabled to obtain 
funds with which to pay for grain sold. On receipt 
of the grain by the New York merchant, he may at once 
trans-ship it to a Liverpool customer, and on his bills of 
lading draw for the amount. By sale of this he obtains 
funds with which to meet the St. Louis draft. The Liver- 
pool merchant meets the draft on him by drawing on a 
Belfast brewer, who settles the draft on him by a bill on 
some London banking house, which is sent him by the 
New York importer of his Irish stout. These international 
drafts or bills are settled by setting one off against another. 
Americans having accounts to meet in London, buy drafts 
against England, and Englishmen having American ac- 
counts to meet will buy drafts against New York. These 
secured bills, in their capacity as instruments for the col- 
lection of funds due ' ' on account, ' ' come to serve in the 
capacity of funds for the payment of other accounts and 



158 FUNDS AND THEIR USES 

avoid the necessity of shipping money from place to place 
in payment of credit obligations. 

Non-payment and protest. — Drafts which are not paid 
at the time for which acceptance is made, or which are not 
accepted, may be protested. In fact, this is the usual cus- 
tom when instructions are not given to the contrary. The 
protest of a bill puts on its face notice of its dishonor, and 
thereafter it ceases to serve as funds. No one will receive 
it in payment. It will be returned to the party drawing 
it, and he will be required to make good the amount, and 
pay all costs and expenses. When the drawer does not 
wish to incur the expense of protest, he will have printed 
or attached to the end of the draft a detachable slip with 
the words, "No protest. Tear this off before presenting." 
This is in the nature of private advice to one presenting. 
Except as between the most reputable houses, such drafts 
are not taken as readily in exchange for the reason that the 
very instruction itself may cast suspicion on the value of 
the paper. 

BIBLIOGRAPHY 

Dewey and Shugrue, Banking and Credit, Chapters iv, v. 

Moulton, H. G., Financial Organization of Society. (Univ. of 
Chicago Press, 1921.) 

Westerpield, R. B., Banking Principles and Practice, Chap- 
ters xlii, xliii. 

Whitaker, A. C, Foreign Exchange, Chapters i, vi, vii. (D. 
Appleton & Co., 1920.) 



CHAPTER VIII 

FUNDS OBTAINED BY SALES OF LONG-TIME PAPER 

Form of long-time credit. — The credit instruments thus 
far described are those commonly used as a means of ob- 
taining funds for current use — i. e., for commercial trans- 
actions ; they are generally referred to as short-time or com- 
mercial paper. When funds are desired for more perma- 
nent use quite a different arrangement must be made. In- 
stead of the credit being due on demand, or in thirty, sixty, 
or ninety days, it is made payable in five, ten, twenty, or 
perhaps fifty years. 1 This precludes the use of accounts; 
it makes necessary a definite or formal, written contract — 
one which will place the terms and amount promised be- 
yond all question. In form, all the instruments used for 
long-time credit transactions are in the nature of promis- 
sory notes. The credit contract itself does not differ from 
the commercial note except as to time of maturity ; the 
essential difference between long-time and short-time paper 
is found in the contract of security given. One can make 
a conservative business judgment of the value of a promise 
to deliver money thirty or sixty days hence; in this the 
personal ability of the one offering his credit for sale to 
obtain funds with which to redeem it, and questions of 
integrity, can be determined with practical certainty. The 
incidents and accidents of life, and the shifting fortunes 
of business, however, make uncertain all judgments of per- 
sonal condition to deliver funds twenty years hence ; judg- 
ment as to the value of a contract for the delivery of money 
twenty years hence, one which rests on personal ability and 

1 In the case of certain Government issues the principal is vir- 
tually never due, only the interest becomes payable, 

159 



160 FUNDS AND THEIR USES 

integrity alone, must be unfavorable. The credit contract 
in itself would be little valued; the one to whom it was 
offered in exchange for funds would refuse to buy it. A 
contract of security is added. Uncertainty being thus 
obviated, the long-time credit may be sold. 

Illustrations of difference in forms and uses of long- 
and short-time paper. — To illustrate the different charac- 
ters and uses of long and short-time credit : Edward Strong 
and Leonard Williams decide to engage as partners in a 
general grocery business at West Point, on the Hudson. 
Each has $1,000 to put into the enterprise. This will give 
the firm $2,000 as cash capital. But they have no stock; 
they have no store building, no office fixtures, no counters 
or shelves, and no provision for service. Besides, they esti- 
mate, a stock worth $2,000 would be too small a one to give 
profitable employment to themselves or to their capital. 
They need a stock of goods that will cost from $3,000 to 
$5,000, a building, and other business equipment. How 
shall they obtain the funds? By consultation with the 
West Point National Bank they find that funds may be 
obtained there to finance their stock purchases ; an arrange- 
ment is made through the president and cashier of the 
bank whereby the grocers are to keep their account with 
them, and, on bills being presented for stock purposes, 
Strong & Williams will execute their promissory notes, the 
bank to give the firm a credit on its books in exchange for 
stock notes to an amount not to exceed $5,000, as occasion 
may require. As a part of the agreement, the grocery com- 
pany is to "deposit" all cash received from customers — 
all money and checks received from sales as fast as they 
are made. This arrangement will enable Strong & Wil- 
liams to buy for cash, and to take advantage of the trade 
discounts offered by the wholesale house. The notes are 
to be made payable on or before ninety days, for the reason 
that it is estimated, that the stock will be turned over, or 



FUNDS FROM LONG-TIME PAPER 161 

sold, once every three months. In such a transaction the 
bank requires no security; it is willing- to rely on the in- 
tegrity of the partners and their ability to make payments 
out of sales — in other words, it is willing to rely on their 
unsecured credit. Strong & Williams now have established 
a line of credit good for $5,000 for stock purchases, and, 
besides, they have their original $2,000 for working capi- 
tal. But how about a building and other equipment? A 
well-located store-room is found which they may rent at $50 
per month — $600 per year. Just across the street is a 
vacant lot, however, which may be purchased for $1,000. 
If they buy this vacant lot instead of renting the store- 
room, they can put up a suitable one-story building for 
$1,000 more. The whole property will cost only $2,000 ; 
the interest on this will be $100 per annum. By such an 
arrangement there will be a clear gain of $500 per year. 
They decide to buy the lot for $1,000, and to spend the 
other $1,000 of the original capital for a building. But 
having done this they have no funds left. To complete their 
equipment, some provision must be made for current 
funds. Current expenses must be paid ; the partners them- 
selves must live; they must pay clerks, delivery, obtain 
supplies of fuel, meet incidental expenses, etc. At least 
$1,000 more of permanent capital is required before they 
are ready to begin business. The West Point National 
Bank is willing to take their short-time notes for funds 
with which to make stock purchases, but it is not will- 
ing to contribute permanent capital — its own business is 
so -organized that it must be able to collect funds whenever 
demands are made by depositors. The problem of get- 
ting more permanent funds is solved by arrangement with 
the Dime Savings-Bank. This institution is willing to 
give Strong & Williams $1,000 for their note, due five years 
hence, bearing interest at the rate of 4V> per cent and 
secured by a mortgage on the building and lot. Current 



162 



FUNDS AND THEIR USES 



funds being provided for in this manner, they take the 
$1,000 received from the sale of the mortgage note, deposit 
it in the West Point National Bank, order a $3,000 stock 
of groceries in New York, execute ninety-day notes for 
this amount, and pay for the goods by check on their ac- 
count at the bank; they begin business, make payments to 
the bank from sales, and execute new notes for adding to 
and enlarging their stock as trade and sales may require. 
If we look at the balance-sheet of the Strong-Williams 
Company on the day that they first received their $3,000 
stock and paid for it, the following financial summary 
would appear : 



BALANCE SHEET, July 1, 1921 



Assets (or business equip- 
ment procured by ex- 
penditure of the funds 
contributed). 

Store building and 

lot $2,000 

Stock 3,000 

Cash (West Point 
National Bank). 1,000 



Total value of assets $6,000 



Liabilities (for funds con- 
tributed) . 
By Proprietors: 

Edward Strong.. $1,000 
Leonard Williams 1,000 
By Creditors: 
The Dime Savings- 
Bank, Mortgage 

Loan 1,000 

Loans, West Point 

National Bank 3,000 



Total liabilities. . $6,000 



Fig. 84. — Mortgage Note. 



This gives a picture of the financial arrangement, the 
sources from which $6,000 of funds were procured for the 
enterprise, and the equipment procured by the use of these 
funds. From this, it appears that $2,000 were contributed 



FUNDS FROM LONG-TIME PAPER 163 

by the proprietors themselves, while $4,000 came from the 
creditors of the concern. Of the credit sold (as a means of 
obtaining these $4,000) that for $3,000 was in the form of 
short-time (commercial) credits, and that for $1,000 was a 
long-time credit contract secured by mortgage. 

Classes of long-time credits. — The kinds of long-time 
credit contracts that are commonly used in business are 
by two classes, viz., "mortgages" and "bonds." Each 
class may have the same kind of security, but the first takes 
its name from the contract of security, the second from 
the character of the note or credit contract given. It is 
stated that each may have the same kind of security. This 
follows as a necessity from the length of time agreed upon 
for payment. Each requires that the ultimate performance 
of the credit contract be assured, and any security which 
would be sufficient to assure the payment of one form of 
long-time credit obligation would be sufficient for the other. 
The difference in the two classes of instruments arises from 
the advantages of sale of the credit contracts secured, and 
from the form which the credit "issue" takes. When it is 
desired to have the secured obligation for future delivery 
of money divided into a large number of small credit con- 
tracts, and sold separately, a bond issue will be resorted to ; 
if one party is found who is willing to purchase the whole 
amount secured and hold it in lump sum, or in the form 
of a few large credit contracts, the "mortgage" will be 
offered. 

Mortgages 

What is a "mortgage"? — That which commonly goes 
in the security market as a "mortgage" is a misnomer; 
it is in reality a credit obligation secured by a mortgage. 
The mortgage is only a part of the thing bought and sold ; 
in fact, if one held only the "mortgage" or security con- 
tract it would be of little value. The promise for the 



164 FUNDS AND THEIR USES 

delivery of money is found in a * ' promissory note ' ' or other 
evidence of debt. The mortgage is only a collateral contract 
which gives to the creditor a contract of lien on the prop- 
erty named as security for the payment of the contract of 
credit. The mortgage may be so drawn, however, as to 
contain the credit contract within and without the use of 
a separate paper. If there are several credit contracts 
(or notes) secured by the same mortgage, these may be 
sold to different persons, and the one who holds the mort- 
gage will be held to be the trustee for them all. In case 
the credit contract or "promise to pay" is written in the 
mortgage, then it would require a separate written agree- 



$1,000.00. West Point, New York, June 1, 1921. 

Five years after date we and each of us promise to 
pay to the Dime Savings-Bank of West Point, or order, 
for value received, One Thousand Dollars, with interest 
payable annually, on June 1 of each year, at the rate 
of 4% per cent per annum. 

This note is secured by mortgage, of even date here- 
with. Edward Strong. 

Leonard Williams. 



Fig. 85. — Short Form of Mortgage Securing Note. 

ment to divide the amount for separate holding, as can be 
done where several notes are issued, each secured by the 
same mortgage, as is shown on page 176. In any event, 
when the credit contracts are paid the mortgage has no fur- 
ther validity, and may be declared void if action is brought 
to clear the title to the property against which it is given. 
There is no more reason for the secured debt of one 
individual (or of a partnership), being called a "mortgage 
security ' ' than there is for the debt of a corporation issuing 
bonds, except that usually the mortgages and credit con- 



FUNDS FROM LONG-TIME PAPER 165 

tracts are kept together. The term "mortgage," however, is 
sanctioned by commercial usage, instead of the descriptive 
phrase, "a credit contract secured by a mortgage." A 
mortgage is a contract which gives to the one in whose 
favor it is made the exclusive right, on default, to sell the 
property named in it, as a means of procuring funds with 
which to pay the credit contract thus secured. In form, 
the mortgage is a conveyance of property, with the condi- 
tion that if the debt is paid the conveyance is to become 
void. When stripped of its legal phrases it is, in substance, 
as shown on page 166. 

Mortgage contracts one of sale.— It will be noted that 
the contract is one of sale. It is, in fact, a deed to the 
property, and if a regular deed is drawn to which the con- 
dition of security for payment is added, the mortgage will 
be complete. By making the mortgage a conditional sale, 
and making the sale a matter of public record, so that the 
public may have notice of the transaction, Strong & Wil- 
liams can not sell the property to any one else and pass a 
good title. This guarantees to the Dime Savings-Bank the 
sole power to sell the property of Strong & Williams ; it 
also reserves the property to them as a means of obtaining 
funds with which to meet their note when due five years 
hence. The result is that the Dime Savings-Bank has con- 
fidence that their long-time note will be paid. They can 
pass a conservative judgment as to its value, and having 
the payments of principal and interest secured, the bank 
offers to Strong & Williams $1,000 for their contracts, to 
deliver $1,000 five years hence, together with current in- 
terest payments of $45 anuually. 

Mortgage without separate note. — Sometimes a memo- 
randum of credit is included in the mortgage itself instead 
of being in a separate instrument, in which case the two 
obligations may not be separated. The laws of some States 
make a difference in the content of such agreements. The 



This contract witnesseth : That 

Whereas, Edward Strong and Leonard Williams have 
this day executed their promissory note to the Dime Sav- 
ings-Bank of West Point, or order, for the sum of One 
Thousand Dollars, due five years from date, with interest 
at the rate of 4^2 per cent ; 

Now, therefore, the said Edward Strong and Leon- 
ard Williams, in consideration of the aforesaid One 
Thousand Dollars to them in hand paid, as evidenced by 
said promissory note, and for the securing of the pay- 
ment of the same unto the said Dime Savings-Bank, or 
its assigns, have sold and conveyed to the said Dime- 
Savings Bank of West Point the following described 
property, to wit : Lot numbered 246, in Block numbered 
36, on Laurel Street, in the Town of West Point, in the 
State of New York, according to official plate thereof, 
filed for record in the office of the Auditor of the County 
of Kings, in the State of New York. 

The condition of this contract is, that if the said 
Edward Strong and Leonard Williams shall pay to the 
said Dime Savings-Bank, or its assigns, the sum or sums 
promised in said note according to the tenor thereof, then 
this contract shall be null and void, otherwise to remain 
in full force and effect. 

In witness whereof we have hereunto set our hands 
and seals this 1st day of June, 1921. 

Edward Strong. [Seal] 

Leonard Williams. [Seal] 

Witnesses : 

Lincoln Stetson. 

John M. Bromley. 



Fig. 86. — Philadelphia Form of Indemnity Bond and Mortgage. 



FUNDS FROM LONG-TIME PAPER 167 

laws of the State of Washington, for example, provide that 
when the credit contract is not evidenced by a separate in- 
strument, the creditor may not collect any deficiency re- 
maining: after the sale of the property mortgaged. Gen- 
erally speaking, however, the funds derived from a sale of 
the mortgaged premises are to be applied to the payment of 
the "note"; any amount that remains unpaid is still a 
charge against the maker of the note. 

Accommodation mortgage. — When one wishing to sell 
his note has no property of his own, he may get a friend 
to give a mortgage on his property as security. In this 
case, one person will execute the note and receive the bene- 
fit of the funds, while another will execute the mortgage 
contract of security. This is the same kind of accommoda- 
tion as the indorsement of another man's note, except that 
it gives to the creditor a lien security instead of a per- 
sonal one. 

The indemnity bond and mortgage. — In Pennsylvania, 
Delaware, and several of the States that still follow old 
English practice, a promissory note is seldom used as evi- 
dence of the credit contract to which a mortgage on real 
estate is given for security. To illustrate : Mr. J. William 
White desires to obtain $2,500, and, as security, offers a 
mortgage on real estate estimated to be worth $5,000. In- 
stead of executing a promissory note — an unconditional 
contract for the future delivery of $2,500, with interest, 
etc. — he executes an "indemnity bond," i. e., a conditional 
contract for the payment of $5,000, the condition of which 
as stated "is such that if the above bounden obligor, J. 
William White, his heirs, executors, administrators, or any 
of them shall, and do, well and truly pay or cause to be 
paid . . . the sum of twenty-five hundred dollars," etc., 
this personal contract of guaranty, together with a mort- 
gage on the real estate mentioned, will be exchanged for 
the $2,500. In such a transaction there is no writing which 



Know all Men by these Presents That /, J. William White, of 
the City of Philadelphia, Contractor (hereinafter called the 

Obligor), am held and firmly bound unto John Doe of the same 
City, Merchant 

(hereinafter called the Obligee), in the sum of Five Thousand Dollars 
lawful money of the United States of Amercia, to be paid to the said 
Obligee, his certain Attorney, Executors, Administrators or Assigns: 
to which payment well and truly to be made, / do bind and 

oblige myself, my Heirs, Executors and Administrators, all and singu- 
lar firmly by these Presents. Sealed with my Seal, dated the First 
day of April in the year of our Lord one thousand nine hundred and 
twenty-one. The Condition of this Obligation is such, That if the 
above-bounden Obligor, his Heirs, Executors or Administrators, or 
any of them, shall and do well and truly pay, or cause to be paid 
unto the above-named Obligee, his certain Attorney, Executors, 
Administrators or Assigns, the just sum of Two Thousand Five Hun- 
dred Dollars lawful money as aforesaid, within three 
years from this date, 
together with interest 
payable half yearly at the rate of six per cent annum, 

without any 
fraud or further delay; and shall produce to the said Obligee, or his 
Executors, Administrators or Assigns, on or before the first day of 
September of each and every year, receipts for all taxes of the current 
year assessed upon the mortgaged premises; then the above Obligation 
to be void, or else to be and remain in full force and virtue : Provided, 
however, and it is hereby expressly agreed, that if at any time default 
shall be made in payment of interest as aforesaid, 
for the space of thirty days after any half-yearly payment thereof 
shall fall due, 

or in such production to the Obligee or his Executors, Administrators 
or Assigns, on or before the first day of September of each and every 
year, of such receipts for such taxes of the current year upon the 
premises mortgaged, then and in such case the whole principal debt 
aforesaid, shall, at the option of the said 

Obligee, his Executors, Administrators or Assigns, become due and 
payable immediately, and payment of said principal debt, 

and all interest thereon, may be enforced and recovered 
at once, any thing herein contained to the contrary notwithstanding. 
And Provided further, however, and it is hereby expressly agreed, 
that if at any time hereafter, by reason of any default in payment, 
either of said principal sum at maturity, or of said 

interest, or in production of said receipts for taxes, within the time 
specified, a writ of Fieri Facias is properly issued upon the judgment 
obtained upon this Obligation, or by virtue of the warrant of attorney 
hereto attached, or a writ of Scire Facias is properly issued upon the 
accompanying Indenture of Mortgage, an attorney's commission for 
collection, viz., five per cent, shall be payable, and shall be recovered 
in addition to all principal and interest then due, besides costs of suit. 
Sealed and Delivered J"£>. S. Lindsay. 

in the presence of us : \ Jon. Edwards. C , — * — V ^J 

J. William White.-! Seal > 

Philadelphia Form of Indemnity Bond and Mortgage — 
Individual Private Bond. 



FUNDS FROM LONG-TIME PAPER 169 

sets out the contract of credit in detail. Evidence as to 
the credit contract is left to the memorandum contained 
in the indemnity bond and in the mortgage. There are, 
however, two contracts of security for the payment of the 
credit contract — (1) a personal contract of security in the 
form of an indemnity bond and (2) a contract of lien se- 
curity in the form of a mortgage Under such a practice 
in Pennsylvania, a creditor may file the indemnity bond 
with a prothonotary and obtain a judgment entry before 
default on the credit obligation, and thus establish a lien 
on all other real property owned by the maker. As a result 
a ' ' straw bond ' ' is usually executed in real-estate mortgage 
transactions — that is, one who knows the law will usually 
get some one to make the bond who has no property; he 
will also pass a deed to this "straw man," and then he 
will execute the mortgage. The evils of the law may thus 
be avoided by the more intelligent ; it operates as a trap, 
however, to catch the unwary. There is only one explana- 
tion for such a lumbering, indirect, and unjust system of 
credit — viz., a slavish following of inherited forms of law 
and business practice. 

Chattel mortgages. — The chattel mortgage pertains to 
business and properties where the chief assets are person- 
alty. A manufacturer rents his building, mechanical 
equipment, and power; he procures another part of his 
equipment by means of capital funds, obtained on credit, 
and gives his promissory note for the amount. To secure 
the funds needed he gives a mortgage on his products. 
These products are so shifting in nature and unstable in 
value that mortgages having this kind of lien security are 
not usually found in the general investment market ; they 
are more usually given to banks or local investors or to 
supply houses. They belong to the short-time or commer- 
cial-paper class rather than to long-time credit trans- 
actions. 



170 FUNDS AND THEIR USES 

Farm mortgages. — A farmer owns a piece of unim- 
proved land. He can make it productive only by building 
fences, houses, and drains, and by procuring machinery 
and horses with which to till the soil. He goes to a loan 
company for the needed funds, offering a mortgage on the 
land as security. Mortgages upon improved farm prop- 
erty, if properly graduated in amount, are safe and prof- 
itable investments. The buyer, however, must exercise care 
and judgment. Unimproved land is not the best character 
of security even though the funds are used to improve it. 
The margin of value is usually a small one between actual 
cost of improvement and the selling price after the im- 
provement has been made. Should there be collusion be- 
tween the loaning agent and the landowner, the money 
advanced may be largely in excess of the actual property 
value. One of the devices of these enterprising companies 
is to offer their own guarantees as to both principal and 
interest of all mortgages negotiated by them. The investor 
should be sure of two things: (1) the safety of the prin- 
cipal; (2) regularity in the payment of the interest. In 
some portions of the United States there is great danger 
of default from causes such as drought, floods, hail, and 
violent winds — causes that may not be anticipated by the 
farmer and over which he has no control. This makes the 
income of the farmer uncertain, and often causes him to 
default in his payments. It is a judicious exercise of 
investment judgment not to contribute large capital to 
such an enterprise on credit; it encourages the farmer to 
become encumbered in obligations which he cannot meet, 
and involves the investor in trouble, loss of time, and loss 
of capital. 

Mortgages on "business property." — Among the best 
kinds of mortgage securities are those held against im- 
proved city real estate, but of this class well-located " busi- 
ness property ' ' is usually preferable to residence property. 






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Underlying Security. 



172 FUNDS AND THEIR USES 

The reason for that is that business property is a regular 
and necessary part of business equipment, and credit prom- 
ises secured by liens on such property become a first claim 
against "net income" of business; residence property, on 
the other hand, is not used for the purpose of income ; the 
rents which support such investments must come from the 
"net profits" of other business after the expenses, interest, 
taxes, etc., have been paid. Fluctuations in values of resi- 
dence properties are usually greater than those of well- 
located business properties, and they are not as good secu- 
rity on this account. The exercise of proper judgment and 
a sufficient margin of safety may make either class of secu- 
rities equally good ; failure to exercise such judgment may 
make either equally bad. 

Mortgages on mines and timber lands. — Mortgages on 
mines are peculiar. By utilizing the resource against 
which the mortgage lien is given, and on which the indus- 
trial manager must rely for his income — in fact, by pur- 
suing the very object for which the capital contribution is 
obtained — the mine becomes exhausted and the security 
depreciated. This must be taken into account in estimating 
the value of the security. Generally speaking, provision 
should be made for a sinking fund — i. e., for annual reduc- 
tion of the principal loan. Another method of protecting 
the mortgagee's interest is to make the whole principal 
due within such a time as to prevent exhaustion of the 
property. It is never safe to allow loans of this kind to 
run twenty or fifty years, as is common in some classes of 
mortgages. 

Parti-mortgage receipt. — Mortgage-notes are usually in 
large amounts — they commonly cover the whole sum bor- 
rowed, unless there is some advantage in having the prin- 
cipal sum paid at different dates. This may make them 
difficult of transfer, for the reason that the investor may 




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Fig. 88. — Parti-Certificate Payable in Gold. 



174 FUNDS AND THEIR USES 

not have the amount of the note available ; if available, 
then he may not wish all of his available funds in one prop- 
erty- or credit instrument. As a means of finding a more 
ready market for mortgages, financial houses have devised 
what is known as a "parti-mortgage receipt.'' This is a 
written statement of the company holding the mortgage 
to the effect that the parti-certificate holder has purchased 
a pro-rata interest in the mortgage. Let us suppose that 
a note is given for $100,000, due in ten years, secured by 
mortgage. For convenience of sale, 20 certificates of $5,000 
each will be issued and sold by the company taking or 
holding the original security. These certificates of interest 
in the original mortgage-note are sold, and thereafter the 
company holding the mortgage becomes trustee for the 
holders of certificates (see page 171). 

The collateral certificate. — In further application of 
this principle the collateral certificate has come into use. 
This is a certificate of interest in a number of securities 
held in trust. A collateral trust is formed — i. e., certain 
collateral securities are placed in the hands of a trustee. 
Against this, collateral certificates are issued and sold in 
denominations to suit the demands of the market. Both 
of the above forms of financial instrument bear a close 
resemblance to bonds ; in fact, they may be said to be a 
' ' cross ' ' between a bond and a mortgage security. The 
form used by Rufus Coffin & Co. is exhibited on the op- 
posite page. A copy of a $25,000 collateral trust certificate 
issued by the trustees of the American Asphalt Company 
(see page 175) is of special interest in this relation, on 
account of the recent failure of that company. 

Bonds 

Bonds, as credit contracts, are not to be confused in 
thought with bonds as contracts of indemnity. Bonds, as 



FUNDS FROM LONG-TIME PAPER 



175 



instruments of credit, where negotiable, may differ from 
promissory notes only in this, that they are issued in se- 
ries. For example : Mr. Russell Sage may wish to build 
a large office building in New York. Let us say that he 
owns a lot at the corner of Broadway and Fourth Street, 
which is valued at $500,000. The office building that he 
has planned for erection on this site is estimated to cost 
$1,000,000. He has $250,000 in cash, which is available 



No. _18S£L. 



55£e<?fi± 



Certificate of Deposit for Collateral Gold Certificates 



deposited under and In accordant* with the provisions of a certain Agreement, dated November 14, 1901, made between 
HENRY W. BIDDLE, RUDULPH ELLIS, AlVIN W. KRECH. EFFINGHAM B. MORRIS, and HENRV TATNALL, Committee, 
parties of the first part ; holders of Collateral Gold Certificates of the Asphalt Company of America, parties of the 
•rcoad part; and the COMMERCIAL TRUST COMPANY, of Philadelphia, and THE MERCANTILE TRUST COMPANY, 
•f New York, parties of the third part. 



The COMMERCIAL TRUST COMPANY hereby certifies that It has received, ^i-o****^ •Ldn.Tzz? 

Certificates, aggregating S^i-So oo.-^fs-. \ which Certificates were deposited in trust subject to 

thk terms of the above described agreement, and subject to the order of the Committee therein named, 
or a majority of them, or their successors, and the holier hereof assents and becomes a party to said 
agreement by receiving this Certificate. The holder hereof is entitled to receive all the securities, 
benefits, and advantages coming to the depositor of said Certificates under said agreement. 

The interest represented herein is transferable by delivery of this Certificate, subject to the terms 
and conditions of said agreement. This Certificate may be registered as to ownership, but after registra- 
tion no transfer, except on the books cf registration, shall be valid, unless thelfst transfer be to. bearer, 
when this certificate shall be transferable by delivery as before. 

CANCELED - 

Philadelphia,. — .....DEC 1 ,.6.19'OJ 



Fig. 89. 



—Certificate Actually Issued as a Receipt for Certif- 
icates Deposited for Purposes of Refinancing. 
(One-Fourth Actual Size.) 



for the purpose- How will the remaining $750,000 be ob- 
tained? Mr Sage calculates that by borrowing $750,000, 
at 4 per cent, the income from the rents will be sufficient 
to pay interest, meet all expenses for repairs, depreciation, 
taxes, etc., give to himself a dividend of 5 per cent on the 
value of the lot and $250,000 invested by himself, and 
leave a surplus sufficient to pay off the $750,000 loan in 



176 FUNDS AND THEIR USES 

fifty years. On inquiry, however, he finds that he can not 
get $750,000 from any one person or investment company 
No one wishes to risk so much on the security of a single 
property. The center of business may change ; the proper - 



$1,000. No 

I, Russell Sage, an unmarried man of the City of New 
York, State of New York, for value received, promise to 
pay to the holder of this bond the principal sum of One 
Thousand Dollars, gold coin of the United States, of pres- 
ent weight and fineness, at the office of the Union Trust 
Company of New York, on the first day of January, 
1948, with interest thereon at the rate of 4 per cent. 

This bond is one of a series of first-mortgage bonds 
issued by the said Russell Sage amounting in all to the 
sum of Seven Hundred Fifty Thousand Dollars ($750,- 
000), all of the same date, for the sum of One Thousand 
Dollars each, and each of which is numbered from one 
(1) to seven hundred fifty (750) inclusive, and all of 
which are secured without discrimination or preference 
by a first mortgage duly executed by said Russell Sage 
on the following property: Lots numbered forty (40) 
and forty- two (42) of Block numbered ninety-six (96), 
of the City of New York, together with the buildings and 
improvements erected thereon, or hereafter to be erected, 
the same being located on the northwest corner of Fourth 
Street and Broadway in the City of New York. 

Russell Sage. 



Fig. 90. — Individual Private Bond. 

ties adjoining may come to be used for manufacturing pur- 
poses ; many changes are possible within fifty years which 
would cause his property to depreciate in value and impair 
the security of the loan. Those persons who make it a 



FUNDS FROM LONG-TIME PAPER 177 

business to loan money on business property will not invest 
all their funds in one security; they prefer to invest in a 
variety of securities as a protection against loss. "While 
they are not willing to take the whole amount, they would 
gladly invest in a portion of the amount if each part were 
equally well secured. In order to effect this, he decides 
to divide the loan into 750 parts of $1,000 each, and give 
to the Union Trust Company a mortgage on the property 
as security for payment of interest and principal. In other 
words, he decides to issue a series of seven hundred and 
fifty first-mortgage notes or bonds, in form the same as 
the bond or note shown on page 176, but numbered serially. 

The trust company as agents of sale and transfer. — 
Having executed his bonds and mortgage, Mr Sage places 
them, together with $250,000 in cash, in the hands of the 
Union Trust Company, under an agreement that they may 
dispose of the bonds to purchasers, and that when the entire 
issue has been disposed of (not until then) a contract will 
be made for the erection of the building, according to the 
plans and specifications previously adopted, the trust com- 
pany to have the general supervision of the construction 
and of payments. The Mercantile Trust Company, as 
trustee of the Peter Cooper estate, has funds to be invested, 
and after examining the security for the payment of the 
bonds offered by Mr. Sage, it decides to take one of them 
at $1,000. The Mercantile Trust Company therefore makes 
a deposit with the Union Trust Company, for which the 
Union Trust Company gives its receipt in form similar to 
that shown on page 178. 

Such a contract protects the purchaser against loss on 
account of failure to sell the entire issue, while the contract 
of trust which gives to the Union Trust Company the 
superintendence of the construction and the disbursement 
of funds, amply protects the bondholders' security. When 
the entire issue has been disposed of, the trust company 



178 



FUNDS AND THEIR USES 



will deliver the bonds to respective purchasers, and as a 
result of the bond sale will have $750,000. On page 179 
is a copy of a receipt used in the bond sale of the Glen 
Echo Railroad Company. 



$1,000. New York, November 17, 1921. 

This is to certify that the Union Trust Company has 
received from the Mercantile Trust Company, trustee of 
the Peter Cooper estate, One Thousand Dollars on deposit 
for the purchase of one bond of an issue of Seven Hun- 
dred Fifty, each for the sum of One Thousand Dollars, 
executed by Russell Sage of New York, and secured by 
mortgage on Lots 40 and 42, Block 96, of the City of 
New York, together with the buildings to be erected 
thereon, to be known as the Sage Block, at the northwest 
corner of Fourth Street and Broadway, which said bonds 
and mortgage, together with a cash deposit of $250,000 
made by Russell Sage, are held in trust by the Union 
Trust Company. 

The condition of this deposit is, that if all of the said 
issue shall be sold at par on or before January 1, 1922, 
then the Union Trust Company will deliver to the above 
named depositor the bond herein contracted for ; but that 
in case the entire issue shall not be so sold, then the said 
deposit may be withdrawn, and in any case, without fur- 
ther authorization, it shall not be applied to the purchase 
herein described and set forth. 

The Union Trust Company, 

Jacob Fressenden, President. 



Fig. 91. — Receipt for Money Deposited on Bond Purchase. 

Unsecured bonds. — The amount received from bond 
sales, added to the $250,000 cash deposit made by Mr. Sage, 
provides the $1,000,000 to be expended in the erection of 



FUNDS FROM LONG-TIME PAPER 



179 



the office building, on the disbursement of which the lot 
and structure will stand as security for the payment of 
the bonds. Herewith (page 180) is given a copy of bond 
issued by the Bank of the United States after it was incor- 
porated under the laws of the State of Pennsylvania. This 
was an unsecured bond. It had no mortgage or other col- 
lateral contract to vouchsafe its payment. The purchaser 
relied entirely on the credit of the bank. It stands on the 
same basis as an unsecured note, except that the issue was 
in even amounts of £1,000 each, and ran ten years instead 
of being made payable in sixty or ninety days. 



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Subscription. 

The similarity in form of bonds to promissory notes, as 
well as the advantage of serial issue, is illustrated by the 
first mortgage real-estate bonds of the Philadelphia Mort- 
gage and Trust Company (page 181). This company has 
loan offices in different parts of the country. The bond here 
shown is one provided for its Birmingham agent. One 
wishing to obtain $20,000 on improved real estate in Ala- 



180 



FUNDS AND THEIR USES 



bama, will issue 20 bonds or notes in series, each of which 
is a contract for the payment of $1,000. These will be 
secured by a mortgage executed to the Philadelphia Mort- 
gage and Trust Company. The Philadelphia company will 




Fig. 93. — Unsecured Bond, Bank of the; United States, 
for Sale in London (One- Fourth Actual Size). 




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182 FUNDS AND THEIR USES 

buy the entire issue. It will then hold the mortgage, or 
assign it in trust to some trust company to be held as se- 
curity for the payment of all, and sell the notes thus 
secured to customers in such numbers or amounts as its 
customers may desire. This arrangement allows the notes 
to be placed on the market and disposed of to better ad- 
vantage to all parties than if the contract for payment 
were in one instrument. An exhibit is also shown on page 

183 of a form of bond issued by Mr. William E. Bailey, of 
Seattle, "Washington, as a means of obtaining a part of the 
funds necessary for the erection of an office building in 
that city known as the Bailey Building. 

Bonds distinguished from notes. — The only way that 
a bond is distinguished from an ordinary promissory note 
is by the fact that it is issued as a part of a series of like 
tenor and amount, and, in most cases, under a common 
security. By rule of common law the bond is also more 
formal in its execution. The note is a simple promise (in 
any form, so long as a definite promise for the payment of 
money appears upon its face), signed by the party bound, 
without any formality as to witnesses or seal The bond, 
on the other hand, in its old common-law form, required a 
seal, and had to be witnessed in the same manner as a deed 
or other formal conveyance of property, and though assign- 
able was not negotiable. This is still the rule within many 
jurisdictions. 

Security for bonds. — The contract of security for the 
payment of a bond issued may be one giving to the holders 
a lien on property, or it may be entirely personal. For 
example, one may wish to obtain $100,000. To this end 
one may offer for sale 1,000 bonds for the payment of $100 
each. If the purchaser or purchasers are not content to 
rely on the unsecured promise of the maker, personal 
security may be added — they may be guaranteed, or, when 
negotiable, indorsed. The security for a bond issue, like 




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that of a note, may 
be found written 
upon the face or 
back of the bond it- 
self. On the margin 
of the certificate of 
indebtedness (or 
bond) of the Ocean 
View Cemetery Com- 
pany will be found 
the written guaran- 
tee of the Metropoli- 
tan Land Company, 
see page 185. 

This is a personal 
security in the na- 
ture of a guarantee, 
which is added to the 
credit contract or 
bond. This particu- 
lar bond also has 
lien security in the 
nature of a trust 
deed and a sinking 
fund. The contract 
made by the Reading 
Terminal Company, 
guaranteeing pay- 
ment of Reading 
Railroad Company 
bonds issued for 
funds with which to 
build the depot at 
Philadelphia, is ex- 
hibited on this page. 



FUNDS FROM LONG-TIME PAPER 185 

FOR VALUE RECEIVED THE METROPOLITAN LAND COMPANY HEREBY GUARANTEES 
THE PAYMENT OF BOTH PRINCIPAL AND INTEREST ON THIS CERTIFICATE WHEN DUE, 
NEW YORK, SEPTEMBER IOTH, I92I. 

METROPOLITAN LAND COMPANY, 

By PRESIDENT 

Indorsement of a negotiable bond carries with it the 
same significance as indorsement on a note. It may, how- 
ever, be qualified by writing in any manner agreed on by 
the parties. The form of indorsement found on the back 
of the bonds taken and sold by the Philadelphia Mortgage 
and Trust Company, before referred to (page 181), is 
reproduced on page 186. 

When the company wishes to assign a bond without 
being bound as an indorser or guarantor, another form of 
indorsement is used. It may be assigned without recourse, 
or may specifically limit its liability. 

Trustees of bond security. — A mortgage security given 
for the payment of a bond issue is usually executed to a 
trustee — some disinterested party who holds the security 
for the benefit of all concerned. This becomes necessary 
from the fact that the bonds are held by a number of per- 
sons; all of them are interested in a common security. If 
one of the bondholders were to hold the mortgage he might 
derive an undue advantage over other holders. Such an 
arrangement would deprive a bond issue of its special 
advantage. . The rights of all parties are protected by mak- 
ing some disinterested person trustee for the purpose of 
holding and administering the security. 

Who may be trustee of a bond issue. — Since the trust 
company has come to be a prominent feature of financial 
life, it is the usual thing to have mortgage security of a 
bond issue made to such a company in trust. It is from this 
class of relations that the trust company derives a large 
part of its business. Any one who is capable of receiving 
title to property, however, may become a trustee. It 
sometimes happens that one of the bondholders will hold 
the mortgage for himself and all others. This makes 



186 FUNDS AND THEIR USES 

him responsible as trustee to the other bondholders. 
How corporate bonds differ from corporate shares. — 
Very often stocks, as well as bonds, are called "securities." 
On this account it may be well to distinguish between cor- 
porate shares and corporate bonds. The corporate share is 
a certificate of proportionate proprietary interest in a cor- 
poration — that is, it is received in exchange for contribu- 



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tions of funds made by a proprietor. The bond, on the 
other hand, is a credit obligation of the company. The 
stockholder stands in much the same relation to a corpora- 
tion as does a partner to an unincorporated company — i. e., 
he is a joint owner of the concern. The bondholder, how- 
ever, has no interest in the company; he simply holds a 
contract which binds the corporation to pay him a definite 



FUNDS FROM LONG-TIME PAPER 187 

sum of money. The bondholder usually has some kind of 
security for the fulfilment of his contract; the stockholder 
has no security, and can have none, (1) because his con- 
tract is not one for the payment of a definite sum of money ; 
(2) because his income, as a proprietor, can be nothing but 
a share in the dividends declared out of the profits of the 
company after the payment of all credit demands. 

Definition and Classification of Corporate Bonds 

Guaranteed and indorsed bonds. — With reference to the 
nature of security, corporate bonds fall under two classes, 
each of which has several subdivisions. Those which are 
based on personal security are either "guaranteed" bonds 
or "indorsed" bonds. These have been discussed and dis- 
tinguished at such length that nothing further need be 
said except to call attention to the fact that they form a 
part of the classification determined by the nature of the 
security offered. 

Bonds based on lien security. — The different kinds of 
bonds based on lien security are numerous. Many of these 
take their names from the character of the property against 
which the lien runs. Among the most commonly found 
upon the market are the following : 

Real-estate bonds. — It may happen that a corporation 
will have large holdings of real estate which may be sep- 
arated from its other properties. Many of the railroads 
have received land grants from the Government, and de- 
siring to use these lands as a basis for security instead of 
selling them, a separate issue of bonds has been made upon 
the real estate as security. They are called real-estate 
bonds, to distinguished them from the other bonds issued 
by the company having a different kind* of lien security to 
assure payment. 

General mortgage bonds. — Instead of dividing the prop- 
erty, however, and issuing one kind of bonds on the secur 



188 



FUNDS AND THEIR USES 



ity of one property, and another issue on another property, 
an issue may be made, the security for which is a mortgage 




Fig. 98. — General Mortgage Railroad Bond Contract. 



FUNDS FROM LONG-TIME PAPER 189 

on all of the properties of the corporation This is com- 
monly called a "general mortgage" (page 188). 

Blanket mortgage. — If mortgages have already been 
given on particular parts, and subsequently another mort- 
gage is given for the security of a new issue covering the 
whole property, the new general mortgage is called a 
"blanket mortgage." That is, it is a mortgage which 
covers the properties held as security for the payment of 
all previous issues. 

Consolidated mortgage. — Several independent properties 
or corporations may be consolidated. Each of these com- 
panies consolidated has creditors to be paid, and the new 
company has need for new funds. In order to provide for 
the redemption of bonds outstanding against the old com- 
panies, as well as for financing the needs of the new one, 
the whole debt is consolidated and bonds are issued under 
a common security to this end. A consolidated bond, 
therefore, is one of an issue secured by a general mortgage 
on properties consolidated, the purpose of the issue being 
that of refunding the outstanding obligations of the sev- 
eral concerns combined. 

Divisional bonds. — A large system of railroads is com- 
monly made up by consolidating or uniting a number of 
smaller companies. The New York Central was organized 
in 1854 as a consolidation of seven or eight short local lines 
running along the Erie Canal. The Pennsylvania system 
is made up of a large number of smaller systems. The 
New York, New Haven & Hartford is another example of 
this kind. When these consolidations are made there are 
usually several bond issues already outstanding on the sev- 
eral roads that enter into and become a part of the new 
consolidated system. These old roads become divisions of 
the new system, and their separate outstanding bonds are 
called "divisional bonds." The term applies to railroad 
bonds of this kind alone. 




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FUNDS FROM LONG-TIME PAPER 191 

Collateral trust bond. — The bonds so far discussed have 
had for security a mortgage on some form of real prop- 
erty. Very often the bond issue is based on personal prop- 
erty. One of the most common of this class is the collat- 
eral trust bond. This is the same as a collateral note, 
except that the whole issue has for security other stocks, 
bonds, or mortgages placed in the hands of a trustee under 
a contract which provides for their sale. These securities 
are placed in trust for the payment of principal and inter- 
est. They may be sold and the proceeds applied in case 
of failure of the one issuing the bonds to make payment 
at the time that interest or principal of the issue becomes 
due. These contracts of trust, or collateral security, usually 
allow the maker to substitute securities of equal value in 
case he wishes to use or dispose of any part of those orig- 
inally deposited; such substitution, however, is subject to 
the discretion of the trustee. 

Equipment bond. — Another form of bond, the security 
for the payment of which is a mortgage on personal prop- 
erty, is what is known as an equipment bond A company 
wishes to purchase machinery or equipment It has not 
funds enough to pay for the amount needed. The company 
therefore makes an arrangement with a manufacturer of 
equipment, or some company having machinery to sell, to 
take bonds, secured by a mortgage on the machines pur- 
chased, in payment This is one of the devices commonly 
employed in buying "rolling-stock" for railroads and ma- 
chinery for manufacturing plants. The bonds run for a 
comparatively short time, and usually bear a good rate of 
interest. 

Car-trust bonds. — One of the most highly specialized 
forms of railroad securities is what is known as the car- 
trust bond. This is quite different in form from all other 
classes of bond obligations. The car-trust, as it is called. 
is a concern which purchases cars from a manufacturer. 



192 



FUNDS AND THEIR USES 



It will then sell them to a railroad on the instalment plan. 
Or, to speak more strictly, the car -trust will lease the cars 
to the railroad under an agreement which provides that 
when the railroad company has paid a certain amount of 
rent the railroad company shall become the owner of the 
cars, but until such time the car-trust shall own them. 
Let us suppose that the Ontario & Western Railroad should 
arrange with the Central Car-Trust for $100,000 worth of 
cars. It might be provided that the Ontario & Western 
would pay $5,000 per month as rent, and that when it 

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Fig. 100. — Form of Contract Engraved on Car-Trust Bond. 



should have paid twenty months' rent at $5,000 per month 
it would own the cars. The car-trust bond is simply the 
obligation given by the car- trust company, the security for 
which is the cars rented to the railroad, the payment on the 
bonds being secured by payments of rent. The form of 
car-trust issued by the American Transportation Company 
is reproduced in line engraving above. 

Debenture bonds of financial companies. — The term de- 
benture bond is the most loosely used of any of the terms 



FUNDS FROM LONG-TIME PAPER 193 

descriptive or suggestive of financial instruments. De- 
benture means debt, and might be applied logically to any 
kind of a credit instrument. Its uses, however, have come 
to be quite strictly defined in certain financial relations. 
The "debenture bond" of a financial company is a form 
of collateral trust or credit obligation, secured by deposit 
of bonds and mortgages owned by the company. These 
"debentures" are used to obtain funds for permanent use 
in the purchase of other bonds and mortgages, which may 
again be used as a security for a further "debenture" issue. 
A facsimile copy of such a bond issue by the Spokane and 
Eastern Trust Company of Spokane, Washington, is given 
on page 194. From a reading of the contract printed across 
the upper corners of the instrument referred to it will 
appear that "this bond is secured by a deposit of first 
mortgages on real estate representing an amount loaned, 
not exceeding forty (40) per cent of the appraised value, 
other first lien real-estate security, municipal bonds and 
warrants," etc. A schedule or list of the documents de- 
posited in trust for the benefit of the bondholders, is 
indorsed on the back of each bond. The debentures of 
financial companies are regarded as first-class investments. 
They are to be clearly distinguished from railroad de- 
bentures. 

Railroad debenture bonds. — Railroad companies issue a 
form of bond called a ' ' debenture ' ' which is quite different 
in character. These bonds very often have no security for 
the payment of interest ; many times the principal also is 
unsecured. The payment of interest is dependent on the 
surplus net earnings of the road. Instead of being a first 
lien on the properties and incomes of the road, they are 
a last claim, and stand in a rank inferior to all other bonds 
of the company; they are in some respects inferior to the 
unsecured short-time credit obligations of the road; they 



194 



FUNDS AND THEIR USES 



lack the advantage of paper maturing at an early date, 

and have little or no advantage from contracts of security. 

Income bonds. — An income bond is one the interest on 




FUNDS FROM LONG-TIME PAPER 195 

which is payable out of the surplus net earnings of the 
company issuing it. The interest therefore is contingent 
on a remainder of earnings after the payment of all ex- 
penses, cost of maintenance, taxes, interest, rentals, and 
other fixed charges. If there be nothing left, then the 
company is under no obligation to pay interest for the 
year. The interest, however, may be made cumulative — 
that is, while there is no obligation to pay interest if there 
be no funds with which to do so, yet the amount of interest 
contracted for cumulates as a charge which stands ahead 
of all dividends on the common or preferred stock The 
income bond usually has the payment of the principal 
secured by a mortgage, which, although junior to other 
mortgages, gives to the income bondholder a rank ahead 
of the general, unsecured, creditor (see page 196). 

Bonds classified according to their purpose. — Other 
bonds take their names from the purpose of the issue, as 
for example, the Purchase-Money Bonds issued in substitu- 
tion for the indebtedness of the Virginia Central Railroad 
Company (page 198). In 1878 the Chesapeake & Ohio got 
control of the Virginia Central and arranged a consolida- 
tion whereby the securities of the contested road were taken 
up and replaced by the credit securities of the larger corpo- 
ration. To this end, and, as a means of securing funds 
with which to cancel those which could not be exchanged, 
the issue was made. Exhibit is also given (page 200) of 
the Improvement bonds of the Philadelphia & Reading, 
These are issued for the purpose of financing the enormous 
coal properties purchased in the '70s, and for improving 
the equipment of the road for handling its increased busi- 
ness. The bond here shown is an old one; it has been 
through four receiverships and reorganizations — has been 
subject to all the financial extremities of that great system 
whose destiny has been linked with the development and 







STATE Bf MSW YORK. 



Rider&Driver 



PUBLISHING COMPANY 



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Fig. 102. — Form of Income Bond. 



FUNDS FROM LONG-TIME PAPER 197 

manipulations of the anthracite coal regions of Pennsyl 
vania. 

Gold bonds. — Bonds also differ in the contracts of pay- 
ments. The contract may be for the payment of gold coin 
of the United States, of present weight and fineness, in 
which case they are called "gold bonds." 

Legal-tender bonds.— They may be made payable in 
any form of money that is legal tender for the payment 
of debts. These are called legal-tender bonds. 

Coupon bond distinguished from registered bond. — 
With reference to the form of contract for the payment of 
principal and interest, there are two classes: (1) coupon 
bonds and (2) registered bonds. A coupon bond is usually 
made payable to bearer, and the interest payments are rep- 
resented by separate interest notes attached to the prin- 
cipal obligation. When a coupon becomes due, the holder 
of the bond will "clip" or cut off the coupon which has 
matured and present it for payment in the same manner 
as other notes are presented. This is usually done by ' ' de- 
positing" it at the bank where the holder does his busi- 
ness ; the bank will receive it "on account ' ' and send it to 
the office of the company or to the bank where the com- 
pany does its business. The registered bond, on the other 
hand, has no separate contract for the payment of interest. 
In order that the company may know to whom interest is 
due, the owner is required to register the bond with his 
name and address at the office of the company or at the 
office of an agreed financial agent. Then the payment will 
be made by a check, the company remitting interest to the 
registered holder when interest comes due. 

Redeemable bonds..— Bonds may also have a provision 
made for payment before the time of maturity, at the op- 
tion of the maker. For example, a twenty-year bond may 
be made payable at the end of ten years if the maker 
so elect; or a fifty-year bond may be made payable after 



FUNDS FROM LONG-TIME PAPER 199 

twenty- five years, and on the 1st cf January each five 
years thereafter, if the maker so elect. This prevents the 
creditor making- demand before the ultimate time of ma- 
turity, but gives to the debtor the right to pay his debt 
before maturity. 

Convertible bonds. — Other classes of bonds take their 
names from the special privileges granted to the owner 
or holder. Convertible bonds are credit obligations which 
may be converted into some other form of liability. That 
is to say, a mortgage bond may give to the holder the right 
to convert his holding into preferred stock, or a divisional 
bond may be made convertible into a consolidated mortgage 
bond. 

Payment and extension of bonds. — Like a promissory 
note, a bond may be canceled by payment. Being a con- 
tract for the future delivery of money, the contract is ful- 
filled when the money is delivered according to the tenor 
of the agreement. It sometimes happens, however, that the 
maker, or one issuing the bond, is unable to fulfil its condi- 
tions. Then the only remedy is " settlement.' ' A settle- 
ment may be effected by judicial procedure or voluntarily 
between the parties. By judicial procedure, the property 
on which the lien contract of security is held may be sold. 
By voluntary agreement, something other than money pay 
ment may be taken, or an ''extension" may be made. A 
contract of extension is shown on page 202. This contract 
is between the Reading Company (a security-holding con- 
cern) and the Philadelphia & Reading Railroad. 

Receivers' Certificates 

In a corporation to which so many have made contribu- 
tions of funds — a company whose proprietors are divided 
into classes (common and preferred), and whose creditors 
have distinct rights and opposing interests — controversies 







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FUNDS FROM LONG-TIME PAPER 201 

very often arise which require the interference of courts 
to -protect the rights of parties concerned. The property 
is usually in the possession of the officers of the company 
as representatives of the stockholders. When controver- 
sies arise, the parties in possession control the earnings and 
incomes ; they therefore have a marked advantage. The 
earnings of the Pennsylvania Railroad, for example, amount 
to nearly $100,000,000 per year. The entire stock interest 
is only $150,000,000. Let us suppose that those in pos- 
session represent only $80,000,000 of the stockholdings. 
During a year they might divert enough current income 
to repay the entire amount of the investment, while the 
other stockholders and the creditors would be entirely de- 
prived of revenue. It often happens that a controversy 
will last several years. To leave the property in the hands 
of any party in interest might prove ruinous to all others. 
As a means of preventing injustices of this kind, the court 
to which the controversy is referred will appoint an officer 
of its own — some one responsible to the court — to receive 
the property of the corporation and manage it pending 
litigation. Such an officer is called a receiver. 

Security of receivers' certificates. — Litigation involves 
expense. When parties appeal to the courts for adjudica- 
tion of rights and claims, the costs become a first charge on 
the property. Court costs are always the first claims paid. 
The expenses of receivership are in the nature of court 
costs. In the management of a railroad the receiver may 
be required to obtain millions of dollars to pay for opera- 
tion, maintenance, supplies, etc., and to meet current 
demands. To obtain these funds the receiver issues a 
special kind of credit obligation known as a receiver's 
certificate. These are very often issued in uniform amounts 
and in series, so that they appear in the form of bonds. 
But although they have no contracts of security for pay- 



FUNDS FROM LONG-TIME PAPER 203 

ment, by virtue of their being issued for court costs, they 
are a prior lien on all the assets and incomes of the company. 

The advantages of receivers' certificates. — The finan- 
cial advantage of the receiver's certificate to the business 
concern for the operation of which it is used is apparent. 
By its use the receiver is enabled to obtain funds when the 
officers of the company cannot. Quite as marked are the 
advantages to the purchasers of the certificates. By 
obtaining a first lien on the property the holders may force 
all other claimants to terms, and even drive a first-mortgage 
bondholder to settle. This brings the parties to the conflict 
to an adjustment of interests, when otherwise a settlement 
could not be reached except by selling out and winding up 
the affairs of the company. 

Certificates of indebtedness with no due date as to 
principal. — So far we have dealt with long-time paper 
which constituted a promise to pay at a fixed or predeter- 
mined due date. There are other forms of contracts used 
as a means of raising funds that are intended for continuing 
use, and which have no due date as to principal. They 
are made salable by guaranteeing a right to a definite 
income to the holders. There may also be a guarantee of 
the ultimate payment of principal. Their value therefore 
rests on the rate of income promised and the nature of the 
guarantees given — these guarantees of course being con- 
sidered in the light of facts affecting the ability of promisors 
to make the guarantees good. 

One of the best known securities of this type is the Brit- 
ish consol. From the time of the accession of William and 
Mary, life and terminable annuities have been a favored 
method of borrowing money for Government use. The life 
annuity bore a higher rate of annual return to the pur- 
chaser, but the principal became extinguished with the 
death of the holder, or the death of the last survivor of a 



201 FUNDS AND THEIR USES 

tontine group. The terminable annuity was at a lower 
rate, and carried with it a promise of the Government to 
pay the principal at a time which might be suited to its 
purposes, or at such a time after a designated period had 
elapsed, say twenty years. In 1751 a variety of these out- 
standing obligations of the Government was converted into 
issues of one kind which were called * ' consols ' ' — an abbre- 
viation of "consolidated annuities." 

This is a form of credit obligation which has been used 
for funding purposes, also for private institutions that 
have had a philanthropic purpose, or which have under- 
taken to render a service by way of protecting or insuring 
individuals against life's handicaps and risks. Life insur- 
ance companies, for example, have from the beginning, 
offered to persons in younger years an opportunity to pur- 
chase annuities which may be to them a means of support 
in old age. An interesting form of terminable annuity, 
which provides to the concern capital funds, and to the 
contributor an income return is reproduced on page 205. 
This certifies that the person named "is entitled to receive 
interest on that amount up to but not exceeding the rate 
of 6 per cent per annum, so far as the net earnings of the 
society, after payment of all its expenses, shall, in the judg- 
ment of the trustees, have sufficed to pay the same." The 
certificate also stipulates : ' ' The said holder, in the event 
of any dissolution of the society, is also entitled to receive 
repayment of the principal sum so contributed." 

Although in form this obligation is indefinite, both as 
to the rate of income return and as to time that the prin- 
cipal may be paid, and its ownership and transferability 
is conditioned on being "registered," it has proved to be 
one of the most substantial securities on the market. Dur- 
ing the twenty-five years of the society's existence, it has 
paid to contributors the maximum income permitted, and 



206 FUNDS AND THEIR USES 

has built up a surplus of nearly five million dollars. This 
shows that the value of a security for purposes of invest- 
ment depends on the certainty or confidence felt that a 
calculable income will be regularly paid, and that the prin- 
cipal of the investment may be realized by transfer or sale 
rather than by process of redemption. 

The Lease — its Relation to Finance 

A lease is a contract entered into which allows one per- 
son, called the lessee, to use the property owned by another, 
called the lessor. Brown wishes to engage in the business 
of manufacture of cotton cloth. Jones has a factory which 
will suit Brown's purpose. Jones will sell the factory for 
$100,000. Brown has not the funds to purchase the fac- 
tory. His capital is limited to $50,000, and he will need 
this to run the plant. Brown proposes a plan whereby he 
can obtain the use of the factory, and pay for its use out of 
earnings. He offers $10,000 per year to Jones for the use 
of the plant, the amount to be paid as follows : $5,000 in 
six months and $5,000 one year hence. This Jones accepts 
The use of the lease is plain. It avoids the necessity of 
raising funds with which to purchase that part of Brown's 
business equipment. Instead of the factory being a capi- 
tal asset, and the funds represented as a liability, the rent 
becomes a fixed charge against the net earnings from opera- 
tion. The value of the lease is that it makes it possible 
for Brown to obtain a business equipment without raising 
additional funds. 

The lease as security. — Credit transactions are carried 
on under the guise of a lease. The use of the lease by a 
railroad as security for the purchase of cars has been de- 
scribed under the title "car-trust bonds." The same prin- 
ciple is employed in sales "on the instalment plan." One 



FUNDS FROM LONG-TIME PAPER 207 

wishes to purchase a piano. The price is $500. This may 
be paid for at $10 per month. Instead of the seller 
taking a note with a mortgage on the piano as security for 
the payment of the note, he leases the piano to the pur- 
chaser for $10 per month, the agreement being that when 
the purchaser has paid $500 in rent he shall become the 
owner. 

The uses of the lease by credit stores. — Some merchants 
make a special feature of sales on credit secured in this 
way. They advertise extensively, asking people of small 
means, laboring men, etc., to deal with them on credit. 
Instead of making a direct sale, however, they simply lease 
the cook-stove, the carpet, the wall-hangings, the crockery, 
etc., and retain the title to the goods; they collect rents 
till an agreed amount has been paid, when the merchant 
gives the title to the purchaser This allows a man with- 
out accumulated funds to set up an establishment, and 
surround himself with comforts of life which otherwise he 
could not afford He is limited only by his inability to 
pay the rent. 

Dangers of lease purchases. — While the lease gives to 
the merchant the best security possible, it threatens the 
purchaser with loss of the goods and all previous payments 
on them in case of default of one rent payment. In the 
case of the piano purchase above referred to, the purchaser 
may have paid $450 in rents, at $10 per month, and have 
still only a $50 balance before the title would pass, but 
failure to make the next month's payment would give to the 
owner (the piano dealer) the right to take the instrument 
away, and confiscate the whole amount paid in. This is 
the method commonly employed by company stores in the 
mining districts. The miner can get what he will within 
the limits of the judgment of the company storekeeper as 
to the ability of the employee to make payments of rent. 



208 FUNDS AND THEIR USES 

But the laborer stands in constant danger of losing his all 
by having his wages stopped for a month. 

BIBLIOGRAPHY 

Cleveland, F. A., and Powell, F W., Railroad Finance, Chap- 
ters iv et seq. 

Dewing, A. S., Financial Policy of Corporations. 

Largerquist, W. E., Investment Analysis. (Macmillan, New* 
York, 1921.) 

Lilly, W., Individual and Corporation Mortgages. (Doubleday, 
Page & Co., New York, 1921.) 

Lough, Wm. H, Business Finance, Chapter vii. 

Lyon, Hastings, Corporation Finance. (Houghton, Mifflin, 
Boston, 1921.) 






PART III 

INSTITUTIONS AND AGENTS USED IN 
FUNDING OPERATIONS 



PAKT III 

INSTITUTIONS AND AGENTS USED IN 
FUNDING OPERATIONS 

It is customary for writers in the field of economic his- 
tory to distinguish certain stages of economic development 
as characterized by modes of living or civic development 
or economic proficiency. Thus we have the stages of barter 
economy and of money economy and more recently of credit 
economy. But in this more recent stage of economic pro- 
ficiency there has been a refinement of technic in han- 
dling credit instruments which has in actuality brought us 
back to what is virtually barter economy. That is to say, 
the great bulk of commodities, products of the mines, of 
agriculture and of manufacture are bought and sold by 
exchanging one commodity against another rather than by 
selling a commodity for money and buying another com- 
modity with that money. 

This modern system of barter exchange is easily illus- 
trated by the transactions involved in the exportation of 
American wheat, and the importation of English woolens 
and china. If, for instance, a New York grain exporter 
ships to Liverpool a cargo of wheat worth $40,000 he does 
not receive in return a money payment directly from the 
Liverpool importer ; he is paid by some American merchant 
who has, let us say, received a consignment of English 
woolens and china, worth $40,000. No actual money 
changes hands as between the American and British par- 
ties concerned; the woolens and china have simply paid 
for the wheat. Even where the payment is actually made 
by the American merchant to the American exporter, no 

211 



212 FUNDS AND THEIR USES 

money changes hands; the drawing of a check and the 
shifting of a few items on the books of the banks where 
these men carry their accounts, is all that is necessary. The 
whole transaction, or series of transactions, from begin- 
ning to end, is accomplished through credit instruments in 
the normal functioning of credit institutions. 

Not only in international exchanges does this bartering 
of commodities occur ; but in many domestic exchanges 
payments are made in virtually the same way. New Eng- 
land sends her manufactured products to Iowa, and Iowa 
sends her agricultural products to New England. The 
total value of commodities thus exchanged may mount into 
very large sums, but little actual money is used; on the 
other hand, credit instruments, based on the commodities 
exchanging, take the place of money. 

In the commercial world it has become customary to 
make payments through credit institutions ; and the method 
of doing this is the outcome of the evolution of banking 
practice. In order to understand the financial aspects of 
present-day business, then, it is necessary to analyze this 
banking practice and the method of making exchanges, 
which we may properly call credit-barter economy. 

The following chapters describe the institutions which 
are engaged in handling credit instruments, their work 
in facilitating the exchange of commodities and their im- 
portance in the life of a great industrial nation like the 
United States. In fact, so closely connected are the com- 
mercial and banking activities of this country with the 
Government financial operations that it has seemed best to 
begin the third part of the book with a chapter on the 
United States Treasury. 



CHAPTER IX 

THE UNITED STATES TREASURY 

Relations of Government to modern systems of finance. 
— The Government stands in a triple relation to modern 
systems of finance. In the first place, it furnishes a uni- 
form system of money; in the second place, it supervises 
the national banking system, and, in the third place, it 
provides for its own financial needs, that is, arranges for 
its own support. The first of these we call its money func- 
tion ; the second, its banking function ; the third, its fiscal 
function. In this study it is the first two functions, its 
money function and banking function, with which we 
have to deal — its fiscal relations belonging to the realm of 
public finance. The banking function will be discussed in 
the chapter on the Federal Reserve system : we have to do, 
in this chapter, with its money function. 

Need for coined money. — With a primitive people, formal 
acts of Government may not be necessary to the choice or 
use of a common commodity such as money; but out of 
expediency a general practice may grow up ; commodities 
(such as cattle and fur, which in their nature may be used 
as a common standard for the comparison of values, may 
pass as a medium of exchange, and thus partly serve the 
purpose of money. But commodities like cattle, furs and 
wheat have marks of individuality stamped on them by 
nature ; they are bulky and are clumsy things to carry and 
the individual specimens may vary greatly in quality. For 
these reasons the trader, who receives them in payment for 
goods, may find them inconvenient and may not easily pro- 
tect himself against deception and loss. A commodity like 

gold, however, possesses high value in small quantity, is 

213 



214 FUNDS AND THEIR USES 

therefore easily carried about; and, further, each piece 
of gold can be given exact uniformity of weight and qual- 
ity. These are some of the characteristics that make gold 
so serviceable as money. But the division and refinement 
of gold to procure this uniformity of weight and quality 
are purely artificial; by nature gold pieces have not uni- 
formity; they have no individual completeness as have 
cattle or furs, and a few grains added to or taken from a 
piece of gold may so materially affect its value as to destroy 
the serviceability of a coin as a standard for judgment. 

Coinage. — Some common unit of weight and fineness is 
essential. The parties to an exchange, being controlled by 
motives of gain, could not be relied on to give character to 
coin; the Government — the agency of the people devoted 
to general, as opposed to private, welfare — must give the 
metal official stamp, which will stand as a guarantee and 
protect the people against the wiles and arts of individual 
traders. 

Providing for a complex system of money. — Reference 
has already been made to the advantages to be gained from 
the adoption of a single standard or unit for judgments of 
value in exchange. This advantage would suggest the use 
of a single material for money. But a single material does 
not serve well all of the uses of money. The necessity for 
carrying about and transferring such quantities of money 
material as will be of great value suggests the use of a 
" precious" metal for the larger transactions. Materials 
which would best serve in this capacity, however, would 
require such minute subdivisions for small transactions and 
"change" as to be wholly impracticable. Thus gold serves 
well the main purpose — transfers of larger value than 
$2.50. But the pieces representing smaller values would 
easily be lost, and inconvenient in use. Silver does not 
serve well for large exchanges because it encumbers the 
trader; but it is convenient and more practical than gold 



THE UNITED STATES TREASURY 215 

for transfers ranging in value from 10 cents to $2. Below 
this, however, silver is not a convenient money. The sub- 
divisions necessary for smaller "change" make it imprac- 
ticable, and some such metal as nickel has superior advan- 
tages until the minimum of 2 or 3 cents is reached, when 
a still "baser" metal is found to be more convenient. 
Bronze may be subdivided to represent values of fractions 
of a cent, but would be too heavy for transactions of larger 
amount. There is economy, therefore, in a variety of 
metals in the money system. 

Maintenance of a standard. — The practical question to 
the nation, and to the commercial world at large is, how 
can the advantages of a single standard (or a definite unit 
for the judgment of value) be preserved, and, at the same 
time, the unquestionable economy of variety in our system 
of money be maintained ? Long and bitter experience has 
driven men to the conclusion that there is only one solution, 
viz., the establishment of a unit, or standard, in a more 
precious metal, and a system of redemption of all other 
forms of money used, at a fixed ratio. The adoption of 
such a system, however, makes necessary a redemption 
agency, and this can be established and maintained ade- 
quately only by act of Government. 

By redemption of inferior coins. — Redemption, how- 
ever, has the effect of reducing all moneys, other than the 
standard, to forms of credit. They constitute in them- 
selves promises to pay a definite amount of standard money 
according to the ratio stamped on their faces. If, for ex- 
ample, silver dollars are made redeemable in gold when- 
ever a silver dollar shall be presented at a redemption 
agency, then every time a silver dollar is put into circula- 
tion the Government has put out, with this silver dollar, 
its promise to pay to the bearer $1 in gold on demand; 
the possessor of the silver dollar holds a credit obligation 
of the Government for the payment of $1 in gold coin of 



216 FUNDS AND THEIR USES 

the United States stamped on silver instead of having the 
promise written on paper. As a credit instrument, the 
advantage of having the promise to pay stamped on the 
silver coin instead of paper is this : that it adds to the 
promise of the Government a collateral security equal to 
the value of the silver used, and on redemption of the 
promise the Government has this collateral for use again ; 
this increases the assets of the Government held as the 
means of meeting promises to pay gold. The gold price 
of silver coin increases the ability of the Government to get 
gold with which to meet these promises. The Government 
can simply sell silver to buy gold. 

By redemption of paper money. — But the use of credit 
money does not logically stop with redeemable coin. If a 
system of money is developed whereby coins become prom- 
ises of the Government to pay gold, what is there to pre- 
vent it from writing these promises on paper and passing 
that in payment? There is no reason at all, provided the 
Government at all times keeps in condition to meet these 
promises; and if it does not, then silver dollars or copper 
coins would depreciate as well. Government credit stands 
upon no different footing than private credit. The value 
of the promise depends on the judgment of the individual 
receiving it as to the ability of the Government to fulfil its 
obligations. In our system, paper money is nothing more 
or less than a demand obligation on the Government to pay 
gold on call ; there must be gold available, however, so that 
no doubt will be entertained on this score. The only man- 
ner in which Government credit differs from private credit 
lies in the different methods which may be employed by 
the Government to obtain gold with which to pay, and 
this applies as well to its redeemable coin as to its paper. 

The United States Treasury. — The machinery with 
which a Government must equip itself to perform its mon- 
etary functions embraces three distinct plants: (1)A mint 



THE UNITED STATES TREASURY 217 

for giving official stamp and guarantee to its coin. (2) A 
redemption agency for safe keeping of the reserve, and 
for the free interchange of the several forms of money 
used, as the one or the other may be considered more de- 
sirable. (3) A revenue department by means of which 
necessary funds may be procured to keep the reserve intact. 
In our own Government all three are combined in the De- 
partment of the Treasury. The relations of the Treasury 
to our monetary system have been so important in the past, 
and a proper understanding of them is so necessary to an 
appreciation of recent changes, that an account of the con- 
ditions leading to the Treasury's establishment is war- 
ranted. 

History of the Independent Treasury. — The first bank 
of the United States was chartered in 1791 and continued 
in operation for twenty years. In 1816 the second bank 
was organized by the Government of the United States un- 
der a twenty-year charter. Thus for forty years, between 
1789 and 1837, the Government had a bank of its own; 
but, for six years (1811-1817), when there was no Federal 
bank, the Government was obliged to depend on State 
banks. The Government made various banks incorporated 
by the States the depositories of its moneys as well as 
its disbursing agents. These banks, moreover, depended 
on the funds of the Federal Government for the mainte- 
nance of their own credit ; that is to say, whatever loanable 
funds they had were largely based on Government de- 
posits. The State institutions, however, were so far from 
the direct control of the central Government and were so 
unsatisfactorily managed that the currency and finances 
of the country were left in a state of uncertainty which 
paralyzed industry, seriously handicapped private as well 
public transactions, and ultimately culminated in the 
financial disaster of 1837. The charter of the second 
National Bank expired by limitation in 1836; but, due to 



218 FUNDS AND THEIR USES 

the unfortunate interference of President Jackson, the 
Government funds had been transferred to State banks in 
1833, and the Government, for a second time, lost the pro- 
tection and security furnished by the National Bank. So 
that, with the collapse of the speculative balloon of 1833- 
1836, the Government finances were seriously in danger; 
and the Government suffered a loss of many millions of 
dollars through failures of institutions which were serving 
as depositories for public moneys. 

There was a direct loss to the Government in deposits 
with State banks of $28,101,644.91. The loss of the people 
through uncertainty of credit and the fluctuation of 
their money standard was many times greater than that 
of the Government. There was a general demand for a 
change. Van Buren had just come into office when this 
financial calamity occurred. In national politics he and 
his party represented State and local interests as opposed 
to central functions; they were adverse to the chartering 
of a third Bank of the United States. To meet the public 
demand for a sound and stable currency, and at the same 
time not to antagonize State institutions and local interests, 
an Independent Treasury was proposed. After three years 
of political controversy, Van Buren 's measure became a 
law, but so unpopular had the Administration become by 
reason of the financial and industrial depression of the 
time, that in 1840 the opposition carried the country and 
Harrison and Tyler were elected. The opposition was a 
fusion party; Harrison was the representative of the old- 
time Whig — a nationalist in sentiment; Tyler was the 
choice of the ' ' Nullifiers, " an ultra branch of the States 
Rights party. The Whigs favored a central bank. Had 
Harrison lived, the large Whig majority in Congress, un- 
der the leadership of Clay, without doubt would have given 
us a different financial history. But a month after inau- 
guration the President died, and Tyler came to be our Chief 



THE UNITED STATES TREASURY 219 

Executive. Differences arose between Tyler and the dom- 
inant Whig party in Congress ; and when the bill creating 
the third United States National Bank had passed both 
houses, the President vetoed it. The next Presidential 
election, in 1844, resulted in favor of the Democrats — Polk 
was elected President. During his administration the In- 
dependent Treasury scheme of Van Buren was revived, 
and in 1845 it became a definitely established part of our 
financial system. The several sub-Treasuries at New York, 
Boston, Chicago, Philadelphia, San Francisco and other 
financial centers, set up under this system, continued in 
operation without interruption until 1921, when they 
were closed in accordance with an act approved May 31, 
1920, their functions and duties having been taken over 
by the Federal Reserve banks. 

Our money system a refined system of credit.— After 
the establishment of the Independent Treasury our money 
system gradually became a highly refined system of credit. 
The Treasury possessed extensive issue powers, and during 
the Civil War and the Great War these powers were largely 
used. At the close-of the fiscal year, June 30, 1921, the 
credit moneys outstanding, directly issued by the United 
States Treasury, amounted to $448,661,224. As disclosed 
by the 1922 Treasurer's report the outstanding issues were 
as follows : 

United States Credit Moneys Outstanding June 30, 1921 

United States notes (greenbacks) $346,681,016 

Treasury notes of 1890 1,576,184 

Fractional currency notes (shinplasters) 1,999,311 

Old demand notes 53,012 

One- and two-year notes 56,840 

Compound interest notes 157,940 

Minor coins (nickel and bronze) 102,168,420 

Total $448,661,224 



220 FUNDS AND THEIR USES 

The gold reserve fund held against this $448,661,224 of 
paper and token money was, on the same date, $152,979,025. 
In addition to these forms of credit money, there were 
silver dollars and silver certificates in circulation amount- 
ing to $288,788,378. These, of course, would have the value 
of the silver behind them; but since the market value of 
the silver in the coins, most of the time, is less than the 
value stamped on them, the Government must stand ready 
to redeem in gold. The same provision must be made for 
silver certificates as for silver dollars in circulation, since 
a silver dollar is deposited in the United States Treasury 
for every silver dollar certificate issued. During the Great 
War the market value of silver was higher than it had 
been for many years before ; but it has fallen rapidly since 
then; quotations in the New York market for the week 
March 11 to 18, 1922, ranged slightly above and below 64 
cents per ounce. This means that in that week $228,788,378 
in silver dollars was worth something more than half this 
amount; approximately $158,834,000. This left virtually 
$130,000,000 to be covered by the gold reserve. The sub- 
sidiary silver coins in circulation amounted to $271,314,375. 
These would also have a silver bullion value of 51.84 per 
cent, approximately 52 per cent of the face value of the 
coin. The worth of this $271,314,375 during the week 
mentioned was approximately $141,000,000, leaving another 
$130,000,000 to be covered by the gold reserve. Altogether, 
then, the credit moneys to be sustained by the $152,979,025 
of gold reach the total $709,000,000, in round numbers. 

Besides these several forms of Treasury issues other than 
gold, provision was made whereby gold coin and bullion 
may be deposited in the Treasury and certificates issued 
in like amount. Of these there were outstanding at the 
end of the fiscal year of 1921 $795,848,929; but this is 
always considered a special deposit and not available for 
the redemption of other money obligations. 



THE UNITED STATES TREASURY 221 

Bank credit money. — Over and above the credit moneys, 
which are directly issued by the United States Govern- 
ment, the Treasury assumed obligations for the payment 
of Federal Reserve notes, issued under the Federal Reserve 
Act of 1913, and of these there were at the end of the fiscal 
year 1921 $2,618,000,000 in circulation. At one time, in 
December, 1920, there were $3,400,000,000 Federal Reserve 
notes in circulation ; at present, March, 1922, the circula- 
tion has contracted to $2,188,000,000. It is worth while to 
note these fluctuations in volume of Federal Reserve notes, 
since it is this part of the currency which was designed to 
give the elasticity to the medium of exchange demanded by 
modern business. A gold reserve of 40 per cent is held by 
the Federal Reserve agents against these notes, which leaves 
60 per cent of their denominational value uncovered. The 
liability of the Treasury to loss on this account, however, 
is greatly reduced, if not almost entirely obviated by secur- 
ity held in the form of Government bonds and notes, and 
the commercial and bank paper, pledged by the accredited 
banks for payment of the Federal Reserve notes. Nev- 
ertheless, it is a contingent, even if a remote liability 
of the United States Treasury. The National bank notes 
issued against bonds deposited in the Treasury under the 
old National Bank Act, amounting in June, 1921, to some- 
thing over $696,000,000, and the Federal Reserve bank 
notes, to $199,000,000, are two other forms of credit money. 
But these are neither of them in any sense a direct obliga- 
tion of the United States Government. Both of these be- 
ing secured by the deposit in the United States Treasury 
of Government bonds, in case the Treasury had to redeem 
them, it would have the effect of reducing the national 
debt in like amount. For this reason it has not been 
thought necessary to keep a reserve behind them other than 
the five per cent redemption fund maintained by the issuing 
banks at Washington. 



222 FUNDS AND THEIR USES 

The total money in circulation in the United States 
June 30, 1921, is given in the following table : 

Money in Circulation, June 30, 1921 

Gold coin $883,404,285 

Gold certificates 452,174,709 

Silver dollars 75,053,333 

Silver certificates 201,534,213 

Subsidiary silver coin 261,650,873 

Treasury of 1890. . . 1,576,184 

United States Notes 342,649,537 

National Bank Notes . . 877,900,065 

Federal Reserve Notes 2,680,494,274 

Total $5,776,437,473 

The transactions of the Treasury in maintaining the 
various credit moneys at a parity with standard gold money 
are illustrated in the work of its redemption agency for 
the year 1921. 

Redemption and Exchanges fob the Year 1921 

Federal Reserve Notes $238,958,812 

United States Currency 11,829,277 

National Bank Notes 515,665,388 

Federal Reserve Bank Notes 249,104,116 

Silver Certificates 54,573,717 

Treasury Notes of 1890 82,816 

Total $1,015,557,593 

Actual payment of gold not usually demanded. — 
Although there were $1,015,557,593 paid out for redemp- 
tion and exchange of forms of money other than gold or 
gold certificates, standard metal (that is to say, gold coin) 



THE UNITED STATES TREASURY 223 

was not actually used to any great extent. In most cases 
exchange of one form of credit money was made for other 
forms of credit money. Demands for payment were met 
in such form of money or credit as best suited the wishes 
of those making them. A large part of these payments 
are nowadays made in the form of credits to the general 
accounts of the banks at the Treasury. The amount of 
gold actually paid out for redemption of paper money is 
usually small, owing to the fact that, for a long number 
of years, the Government has held large enough reserves 
to inspire absolute confidence in its ability to pay gold 
when it is demanded. 

Importance of gold standard. — No doubt it could be 
asserted that banking is nowadays conducted not so much 
on a basis of gold payments as on a basis of commercial 
transactions, which are manifested in the form of com- 
mercial paper. Especially since the inauguration of the 
Federal Reserve system has this commercial background 
of modern banking been emphasized: banks can increase 
their reserves at the Federal Reserve banks by the simple 
expedient of rediscounting commercial paper. Back of 
this there is a sound banking theory which treats commer- 
cial paper, and properly so, as the representative of exist- 
ing wealth, that is to say, of goods, either in the process of 
manufacture or transportation. These goods, as forms of 
wealth, are as desirable as gold for the purpose of secur- 
ing the payment of money obligations. This view, how- 
ever, cannot be held unqualifiedly, for the simple reason 
that commercial paper does not represent a stable unit of 
wealth, especially when it is issued in payment for goods 
at inflated prices. Furthermore, the business world still 
clings to the idea that gold itself possesses a value not en- 
joyed by other commodities. This may be largely a 
psychological matter resting on historical and traditional 
prejudice. However that may be, the fact remains that 



224 FUNDS AND THEIR USES 

when other forms of payment fail to satisfy, the business 
man throughout the commercial world will take gold in 
payment for debts. It is only by thoroughly understand- 
ing this peculiar position of gold in the opinion of business 
men that we can appreciate the service performed by the 
United States Treasury in maintaining all other forms of 
currency in the United States on a par with standard gold 
coin. 

Maintenance of integrity of our money. — Not only are 
all forms of money made interchangeable by the redemp- 
tion system, and all money made to circulate at a parity 
with standard gold money, but through the redemption 
agency our currency is kept in good condition for general 
use; old and tattered bills are received and destroyed, and 
new bills issued in their stead. The new paper currency 
thus issued under the direct authority of the Government 
in 1921 included $318,842,004 notes and certificates rep- 
resenting the total value of $557,276,000. The Bureau of 
Engraving and Printing, a branch of the Government 
Treasury Department, designs, engraves and prints these 
notes and certificates. It also prepares in a similar way 
the paper currency issued by the Feedral Reserve banks 
and the National banks. 

The mint a money factory. — The mint may be said to 
be the coin factory of the Government. It is here that gold 
and silver bullion is received for coinage, and mechanical 
processes are carried on necessary to the reduction of 
metals to standard fineness and to the production of legally 
prescribed coins. The mint service is distributed over the 
country in such places as will best meet the demand. In 
this service there are five mints and six assay offices. 

The active mints are located at Philadelphia, San Fran- 
cisco, Denver, New Orleans. The assay offices are located 
at New York, Seattle, Boise (Idaho), Carson City (Ne- 
vada), Helena (Montana), Salt Lake City, and Deadwood 



THE UNITED STATES TREASURY 



225 



(South Dakota). According to United States Treasurer's 
report, only three of the mints — those at Philadelphia, San 
Francisco and Denver — are employed in the actual coining 
of money, the others receiving deposits of bullion in ex- 
change for coin. It is to be noted that the coinage plants 
are located conveniently near to the commercial centers, 
while the assay offices are either near centers of metal pro- 
duction or points of importation. 

Coinage of 1920 



Mints 


Gold 
Coinage 


Silver 
Coinage 


Minor 
Coinage 


Philadelphia . . . 
San Francisco . . . 
Denver 


$ 4,565,000 
12,425,000 


$13,033,000 
3,048,000 
3,646,600 


$7,131,370 
1,466,450 
1,095,000 






Total 


$16,990,000 


$19,727,600 


$9,692,820 



Refined bars were produced at the coinage mints and 
assay office at New York as follows : 



Gold and Silver Bars Produced 1918 



Institutions : Deposits 


Refined Bars Manufactured 


of Metal 


Gold 


Silver 


Philadelphia 

San Francisco 

New York 


$ 763,073.03 

108,563,227.34 

28,142,467.25 

79,624,167.82 


$ 993,125.18 

660,118.77 

18,723.99 

3,183,400.47 


Total 


228,092,935.44 


J 4,855,368.41 



It is instructive to note the very large proportion of 
gold received by the Government which is cast in gold bars 



226 FUNDS AND THEIR USES 

rather than in coin. Gold coin is little used and therefore 
demanded only in small quantities, whereas gold bars are 
used extensively as gold deposit by the banks, and for ship- 
ment in remitting trade balances abroad. 

Work of the mint. — A laboratory is maintained at the 
mint for making tests of weight and fineness. This work 
is continuous. A special committee is appointed as a fur- 
ther safeguard. • Coins are standard at .900 ; the limit of 
tolerance is .003, that is to say, the coins may vary three- 
tenths of one per cent above or below the nine-tenths fine. 
But few coins depart more than .001 from the standard, 
showing the exactness with which the unit for judgment 
of value is preserved in the standard money of the United 
States. 

Relation of the Revenue Department. — Since the re- 
serve of gold is not kept equal in amount to the credit 
money outstanding, a revenue department of the Treasury 
is essential. The present reserve fund serves only to give 
confidence in the ability of the Government to meet present 
demands. For the time being, $150,000,000 of gold in the 
National Treasury is deemed a sufficient guarantee that the 
Government will be able to meet its money obligations. But 
it is quite as necessary to give assurance of ultimate ability 
to meet all outside obligations. Under ordinary conditions 
a few millions of dollars in gold will suffice to keep the 
whole $709,000,000 of credit money valued at par. There 
are times, however, when, for business reasons, those hold- 
ing this credit money may wish to have a large portion of 
it redeemed in gold. Demands for gold for private use, de- 
mands for export, or some shock to public confidence in 
the credit system may cause an extraordinary strain on 
the Treasury. The possibility of such unusual demands 
dictates that some means of maintaining the reserve intact 
should be provided. In 1893 the Government found itself 
in a position such that the reserve was not only impaired, 



THE UNITED STATES TREASURY 227 

but its very existence threatened. The result was the im- 
pairment of all the credit relations of the nation. All 
private as well as public credit depends on confidence that 
the Government will be able to redeem its promises, and 
pay gold in exchange for credit money outstanding. It 
is this that links the monetary promises of the Govern- 
ment to its fiscal transactions — that makes necessary a 
revenue power as part of its credit money system. In fact, 
there is a very close connection between the ability of a 
government to tax its people successfully and its ability 
to maintain any form of credit money. 

Gold and other money assets of the Treasury. — The re- 
port of 1921 shows that on June 30 of that year the Gov- 
ernment had in hand $258,881,884 of gold coin and $2,411,- 
502,196 worth of gold bullion, giving a total gold fund of 
$2,617,384,080. This total amount was set apart for the 
respective uses as follows : $152,979,026 for the reserve 
against Government credit moneys, $716,532,989 held 
against the gold certificates in circulation, $1,537,856,895 
as the gold fund of the Federal Reserve Board, leaving 
$263,015,170 for the general fund of the United States 
Treasury. Added to this latter sum, the Government held 
assets in silver dollars, paper money, minor coins, deposits 
in National banks, Federal land banks and Federal Re- 
serve banks, and moneys in transit amounting to $947,- 
811,916. Part of this, $79,315,940, was in gold certificates 
representing that amount of gold coin already included in 
the gold fund. As liabilities against these combined assets 
the Treasury held redemption accounts for National bank 
notes and Federal Reserve bank notes and Federal Reserve 
notes of $287,115,229. The liability for the redemption of 
these bank notes was partly offset by the $15,000,000 of 
bank notes held by the Treasury. 

It will be seen from the above figures that, in spite of the 
vast amounts set aside for special purposes, the Govern- 



228 FUNDS AND THEIR USES 

ment maintains a large fund for the single purpose of 
promptly redeeming the bank note currency. 

Government revenue powers. — The receipts of the 
Treasury for 1921 from various sources were $5,584,517,- 
045 ; the disbursements, $5,094,717,506, giving an excess of 
ordinary receipts over disbursements of $489,799,539. The 
receipt of these funds comes to the Government through the 
exercise of its revenue powers. Of these it has three: (1) 
taxation, (2) sale of available assets, (3) borrowing. 

1. Taxation. — The Government may not always rely on 
taxation to maintain its money reserve. When the demand 
for gold is strong the gold receipts from customs and taxes 
may become too small, and the Government is then unable 
to secure gold with which to protect its reserve. When 
the taxing power is inadequate, disbursements in pay- 
ment of officers, etc., may be made in forms of credit 
money, but this cannot do more than temporarily pro- 
tect the Treasury. The credit money disbursed soon 
finds its way through the redemption agency. The excess 
of credit money paid out during times of strain sets in 
motion the "endless chain" of redemptions that draws 
away the surplus. A decrease in the expenses of govern- 
ment may somewhat lessen the demand, but if the demand 
for gold through outstanding credit currency be strong, 
the reserve may fall to a low point, and in such an event 
neither present economy nor power to obtain future reve- 
nue through taxation can avail at present to maintain it. 

2. Sale of assets of Government. — At times the Treasury 
has relied upon the second revenue power mentioned above, 
the sale of available assets. This was especially true dur- 
ing our earlier history, when the Government lands were 
being sold. The proceeds from the sale of these lands were 
so great during the decade 1880-1890 that the Treasury 
was burdened with the problem of disposing of huge sur- 
plus revenues which piled up from year to year. Of 






THE UNITED STATES TREASURY 229 

course, since then, Government lands as a source of revenue 
have become a negligible factor. Quite recently the Treas- 
ury, in accordance with the Act of 1918, sold silver in its 
possession to the value of $270,121,554. Among the avail- 
able assets today must be counted the large foreign debts 
in the hands of the Government. Although not convertible 
now, they should not be lost sight of. 

3. Government borrowing. — The third money-raising 
power, borrowing, is the one to which the Government has 
recourse in times of extraordinary financial strain. This 
may come through the event of war, or it may come in con- 
nection with the undertaking of some enormous building" 
operation, such as the construction of the Panama Canal. 
Without this power of borrowing our whole credit cur- 
rency would have failed in 1893, and again during the 
Great War, 1917-1920. A government whose taxing opera- 
tions are known to be successful is usually in a position to 
borrow. This borrowing ordinarily takes the form of bond 
issues which are sold to the investing public. Such bonds, 
issued by a well-established government with large re- 
sources and power to protect itself against aggression, 
rarely fall much below par, and are therefore considered 
securities of exceptional value. For this reason United 
States Government bonds form an adequate pledge for 
the payment of such paper money as is issued by our banks. 
This fact helps to make clear the connection between the 
Government debt and the bank credit money. 

The service performed by the United States Treasury is 
at once apparent. Upon it depends the integrity of our 
whole money system, and out of the integrity of the money 
system, and the banking money reserve requirements grows 
our system of private credit. From the United States 
Treasury we now turn to the commercial banking system — 
the Federal Reserve banks and the private institutions and 
agents active in funding operations. 



230 FUNDS AND THEIR USES 



BIBLIOGRAPHY 

Annual Reports of the Secretary of the Treasury. 

Cleveland, F. A., The Bank and the Treasury. Chapters iii et 
seq. (Longmans, Green & Co., New York, 1905.) 

Dewey, R. D., Financial History of the United States. (Long- 
mans, Green & Co., New York, 1915.) 

The standard work on the subject; contains a helpful 
bibliography. 

Kinley, D., The Independent Treasury of the United States and 
Its Relations to the Banks of the Country, Chapters i to vi. 
(Government Printing Office, 1910.) 

Noyes, A. D., Forty Years of American Finance. (G. P. Put- 
nam's Sons, New York, 1909.) 

White, Horace, Money and Banking, pp. 404-410, 413-414. 



CHAPTER X 

THE COMMERCIAL BANK 

Necessity for current funds in industry. — In getting 
together materials and organizing service for business 
on a modern basis, of highest importance are arrange- 
ments for current funds — cash resources. These are 
necessary to exchange. Neither mechanical equipment, 
supplies, nor skilled labor can be obtained to advantage 
without working cash capital. He who is prepared to fur- 
nish such funds is equipped to render a service for which 
the farmer, the manufacturer, and the merchant — all who 
are engaged in the active management of industry — are 
willing to pay. To illustrate : Brown has purchased a mill 
and water-power conveniently located on the edge of the 
great wheat belt. For this he has paid $150,000, but many 
of the machines are antiquated, and expensive to operate. 
Sixty thousand dollars more are expended in improve- 
ments. He now has his mechanical equipment. Still there 
is much lacking. Grain must be purchased ; labor must be 
employed and wages paid ; transportation charges must be 
settled, and current expenses must be met. All these out- 
lays must be made before return may be had on sales of 
goods purchased. He must look for profits for the year 
in the margin of gain between total outlay and total re- 
ceipts from sales measured in terms of the common stand- 
ard of value. The outlay must be made weeks before re- 
turn is had, and this, too, must be commensurate with the 
size of the working plant and the volume of business 
handled. The element of time necessary to the most 
advantageous production and distribution of goods requires 

231 



232 FUNDS AND THEIR USES 

that he provide a working capital (current funds) of 
about $100,000. 

Obstacles to business without a bank. — The question 
now presents itself, How shall these funds be carried? 
Shall he lay in a stock of money ? A delivery of gold will 
satisfy demands on contracts for labor and material; but 
the dangers entailed in keeping such an amount of money 
as is needed, the breadth of the field covered in his busi- 
ness transactions, the variety of interests involved, and 
the number of payments to be made, would render this a 
highly expensive form of cash assets. Every consideration 
disposes him toward a more economical form of "current 
funds," if such may be had. But the miller is not alone 
in this desire. His is not the only business interest in the 
community. Falls City, the place where Brown's mill is 
located, is a town of 10,000 inhabitants. There are a num- 
ber of other industries, each of which is in need of work- 
ing capital. The town is a local trade center, and mer- 
chants of every class are there with stocks of goods to 
supply the wants of country and town. If money were the 
most available means of effecting exchanges, each would 
suffer the same inconvenience— each would be under the 
necessity of keeping a "strong box," fire-proof and bur* 
glar-proof; even then they would not be secure against 
loss. Current funds are an absolute necessity; with a 
stock of money provided, each would have to keep a guard, 
for no box is too strong to be "cracked" with modern in- 
struments, and there is no combination lock that may not 
be "worked" if time and opportunity be given. The ex- 
pense and risk of the money system would not end here. 
Brown is doing a business that would involve the handling 
of from $5,000 to $20,000 per day ; much of this outlay is 
made in transactions of small amount ; it would be neces- 
sary to have a comparatively large, highly paid, and re- 
sponsible clerical force to count out the money and make 



THE COMMERCIAL BANK 233 

change. The business organization of the whole place 
would be encumbered with expense and inconvenience, and 
transactions at a distance would be made extremely diffi- 
cult. Such conditions as these furnish the business oppor- 
tunity for such service as the commercial bank is organized 
to render. The service and the profits made and the mutual 
advantages gained by the first bank in Falls City suggests 
the organization of another, and still another, until at the 
present time there are a number of banks in the place, all 
doing a thriving business. 

Bank furnishes current funds in the form of "bank 
credit." — With this equipment, instead of carrying a large 
amount of money in purses and vaults, and keeping a guard 
and a large corps of money-changers, the miller has on his 
desk a "check-book." His $100,000 "cash" capital is 
divided between his local town and New York. Temporarily 
he has $50,000 in gold locked up in "safe deposit." This 
he withdraws and sends by express from New York to 
Falls City. On arrival at his place of business he orders 
the express company to deliver the gold to the Fall City 
Bank ; with this he buys a bank account of $50,000 — i. e., 
he "deposits" the amount, and receives credit to like 
amount ' ' on the books of the bank. ' ' 

Exchanges "bank credit" for money. — He also takes all 
moneys received by him in the course of his business to 
the Falls City Bank and exchanges them for bank credit. 
Now, when grain is purchased from the farmers around, 
or from the local dealer, or when wages are paid or ma- 
chinery and supplies are bought, or transportation charges 
are to be settled, Brown signs a check for the amount in- 
volved. He draws against Falls City or New York, as 
may be to his greater advantage. For local payments he 
makes out a local check; if an Eastern account is to be 
settled, he checks against New York. His local bank may 
be a correspondent of a New York bank, i. e., may have a 



234 FUNDS AND THEIR USES 

deposit in New York or an arrangement by which the New 
York bank will accept drafts of the Western bank up to a 
certain amount. In the latter case the local bank has 
bought bank credit "by the wholesale" and in turn Brown 
has bought some of this same credit "at retail." More 
commonly nowadays, however, with the development of 
the Federal Reserve system, a local check may be collected 
at par anywhere in the United States. This process will 
be mentioned in the next chapter. 

Allows its customers to convert "business credit" into 
"bank credit." — But the bank renders another service. 
Nearly all payments made to the miller for goods are in 
the form of credit. ' ' Cash ' ' sales are for checks and drafts 
of customers; sales on "time" are exchanges of goods for 
notes or credit accounts — credit obligations of purchasers 
to pay money at a future time. None of these may be used 
to advantage by Brown as "current funds"; neither can 
he present them for payment at the time and place speci- 
fied; nor can collections be made to advantage by Brown 
personally. The places are widely scattered ; it is impor- 
tant also that he give his time to other matters of business 
than the collection of checks and drafts and credit obliga- 
tions. He therefore writes his name across the backs of 
checks and drafts (indorses them) and turns them over to 
the bank. The bank not only assumes to attend to their 
presentation and collection, but it credits Brown at once 
in full with the amount turned over. The miller has a 
pass-book — i. e., a book of convenient size to be carried in 
his pocket — in which the receiving clerk at the bank enters 
the amount of the checks and money received "for deposit" 
on the debit side. The debit side of this book represents 
Brown's credit at the bank— the amount that the bank is 
indebted to Brown. Periodically — say once a month — this 
pass-book is turned over to the bookkeeper at the bank, 
and he enters on the credit side the amount of items paid 



THE COMMERCIAL BANK 235 

by the bank on Brown's order. The bookkeeper then 
strikes a balance and makes a new entry of the amount still 
owing by the bank on the debit side. Each afternoon 
Brown 's bookkeeper makes a memorandum of all the money 
and checks received in the course of the day's business on 
what is known as a " deposit slip." This, together with 
money, checks, and pass-book, he takes to the bank and 
hands to the receiving teller for a new entry to Brown's 
account. 1 In exchange for the checks, drafts, and notes 
(commercial paper) sent in for "deposit," Brown re- 
ceives ' ' bank credit, ' ' the bank relying upon Brown 's guar- 
antee of indorsement on the commercial paper deposited. 

Serves as agent for the presentation and collection of 
"business credit." — If, however, there are notes and ac- 
counts that have been obtained by Brown in the course of 
his business that he does not find it convenient to turn into 
cash, these may be turned over to the bank upon Brown 's 
indorsement "for collection." The bank in this case does 
not at once give Brown the right to draw against it. It 
does not exchange anything for these credits so turned 
over. It simply assumes to act as Brown's agent for the 
purpose of presentation and collection, and when collec- 
tion is made sends notice of the fact. 

Acts as trustee. — The funds so held are trust funds, and 
they remain "in trust" with the bank until order is re- 
ceived from Brown to place them to his general account; 
in which case, if the bank acts upon his order, an exchange 
is made of ' ' bank credit ' ' of like amount for ' ' trust funds ' ' 
held, and the trust ended. It may be to Brown 's advantage 
at times to withdraw a certain amount of money from the 
bank ; in other words, to exchange ' ' credit ' ' to his account 
for "money," which amount so withdrawn may be placed 

1 More and more the ''monthly statement" is taking the place of the "pass- 
book." When this is used both the bank and its customer keeps a separate 
account; then the bank renders its "statement" which is "verified" by the 
customer. In the case of very large and active accounts a "weekly statement" 
may be rendered. 



236 FUNDS AND THEIR USES 

with the bank in trust for some special use or business pur- 
pose. This will also place the bank in relation of trustee 
instead of debtor, and the funds so held will be held for 
Brown and subject to Brown's order and direction; they 
can not be used by the bank as assets of its own. The bank 
may in many other ways serve the business community as 
trustee in the caring for and handling of current funds. 
The Federal Reserve Act gave to National banks the op- 
portunity of exercising trust powers which had been denied 
them previously. An important condition imposed by the 
law is that trust funds shall be separated from the usual 
commercial funds of the bank. 

Sells exchange. — Brown's New York bank account may 
run low, and he may wish to increase it. For this purpose 
he may draw out gold from the Falls City Bank — i. e., may 
demand payment of his deposit in gold or other "legal 
tender" — and transfer this to New York by express. But 
if he has in mind his own business advantage he will not 
withdraw gold or other forms of money. It will cost him, 
say, $1 for $1,000 to ship money to New York. He will 
instead seek "exchange." He asks the cashier how much 
he will charge for a check of the bank on its New York 
account. The bank could never ask more than the cost of 
sending gold, for in such case the customer himself would 
"draw" on the bank. It will usually ask less. The bank 
is able to do this because demands are made in New York 
for money to be sent to the West. If checks are drawn 
for remittance to the West, then, on settlement between 
the various banks, only so much money will have to be sent 
from one to the other as represents the balance due. The 
Falls City Bank may have on its own counter $10,000 of 
"exchange" on New York, or may know where it can ob- 
tain that amount at par. If Brown wishes to send $15,000 
to New York, and the bank has. at par, $10,000 of New 
York exchange, at $1 per $1,000, it will cost only $5 to 



THE COMMERCIAL BANK 237 

send the balance. The bank could therefore sell $15,000 
of exchange to Brown at $6 and make $1 profit on the 
transaction, while Brown would be $9 better off than if he 
had shipped the money. He would prefer to pay the $6 
rather than spend the time necessary to find exchange else- 
where, even though he might save 50 cents or $1 by so 
doing. The sale is therefore made. Brown makes out his 
check against the Falls City Bank "on account of New 
York exchange" for $15,000, and in exchange therefor be- 
comes the owner of a $15,000 cashier's check, or draft, of 
the Falls City Bank on its New York "correspondent." 
Buys and sells foreign moneys. — In the course of his 
business Brown may have contracts for the delivery of 
grain in Liverpool. As a matter of advantage in purchase 
he may wish to go to the interior of Manitoba for wheat. 
To purchase there, it may be to his interest to have money 
instead of bank credit. He withdraws from the bank at 
Falls City $5,000 in paper money — he does not care to be 
encumbered with the weight or run the extra risk of carry- 
ing gold. He finds, however, that the farmers are not 
acquainted with this sort of "paper," and do not care to 
take it in exchange for wheat. He still does not find it 
convenient to carry the necessary amount of coin, and 
therefore goes to a Canadian bank for the purpose of ex- 
changing American "bills" for Canadian '.'paper money," 
a form of credit that the farmers have confidence in, and 
are willing to accept as a par value with gold. But the 
Canadian bank will not trade without profit. It offers to 
buy American bills at 98 cents. In exchange for $5,000 of 
American money, therefore, Brown receives $4,900 in 
Canadian bills, which he takes out into the Manitoba fields 
and exchanges for wheat. He has paid $100 exchange on 
Canadian money, but has had a service rendered him by 
the Canadian bank that is worth much more than the price 
paid. 



238 FUNDS AND THEIR USES 

Acts as bullion broker. — On his way homeward he stops 
at Deadwood, where he finds a merchant who wishes to 
buy flour. The trader's business is to furnish supplies to 
mining-camps. He has little money, but possesses a stock 
of bullion which he has received in the course of trade. 
Brown offers to sell flour F. 0. B. at the market price at 
Falls City, and to receive in payment bullion at the market 
rate in New York. The bullion is consigned to his New 
York bank, and on its arrival Brown is given credit on 
his account at the market price of silver, less commission. 
Returning to Falls City, he finds awaiting him there notifi- 
cation of the credit given, and he thereupon places on 
board the cars, billed for Deadwood, the amount of flour 
contracted for. In this way the sale is made to the Dead- 
wood merchant as readily and conveniently as if he had 
possessed gold or paper money instead of 'bullion of uncer- 
tain quality. 

Binds together and enlarges business relations. — The 
bank has served Brown and his business by relieving him 
of the expense and risk of keeping current funds in the 
form of money. It has furnished him with a kind of credit 
that will serve him more conveniently for cash. It keeps 
his credit accounts and makes collections, through its 
agents, of all checks received by him in his business. It 
acts as his agent for the collection of notes and bills. It 
serves as trustee in matters where he may gain business 
advantage through such service It has enabled him to 
procure money with which to deal in foreign lands. It 
has enabled him to dispose of bullion and to trade with 
those having it as conveniently as if they had coin instead. 
All these services are of marked advantage not only to 
Brown, but likewise, by similar arrangement, to all other 
business in the community. Throughout the country, in 
fact throughout the civilized world, these institutions have 
grown up, and by maintaining their own credit engage- 



THE COMMERCIAL BANK 239 

ments with others, men are able to make exchanges of 
large value by use of credit instead of money. By main- 
taining its own credit the commercial bank likewise com- 
pels its patrons to fulfil their obligations ; by giving greater 
certainty to business judgment and greater facility to ex- 
change, it has become a potent factor in widening the range 
of commercial industrial enterprise and increasing the 
opportunities for profit to those who have the ability to 
avail themselves of industrial and commercial advantage. 
Such, in brief, are the principal services rendered by the 
commercial bank to the business community. 

Profit of the bank. — But how does the bank profit? 
Does it charge its clients for making exchanges of "money" 
for "bank credit"? No. Does it receive compensation 
for keeping deposit accounts ? No. Does it charge for col- 
lecting checks on other banks that are received in the course 
of business and turned in "for deposit"? No. Does it 
charge for "collections"? In most cases it does not. More 
than this, it often pays its customers something for the 
privilege of performing these services. In recent years the 
competition has been so keen for the privilege of carrying 
active accounts that low rates of interest are paid on depos- 
its above a minimum of $300 to $500. How, then, can 
the commercial bank afford to employ a staff of officers and 
clerks, build and maintain costly business houses and 
strong vaults, keep guards and watchmen, carry a large 
stock of coin and bullion of their own with which to meet 
outstanding credit when demand is made for money, pay 
mailing expenses and transportation charges, and make 
other outlays incident to services rendered to the business 
community? It meets all these charges out of the income 
of its business. Banks pay large salaries to officers and 
employees, and they also make a good profit in dividends 
to their stockholders. 

Profits arise out of exchange of "demand credit" for 



240 FUNDS AND THEIR USES 

"time credit." — The bank obtains a small proportion of its 
income from sales of exchange, from transactions in coin 
and bullion and other incidental services, but the principal 
income, the income upon which the bank relies for its suc- 
cess, arises from the fact that it deals in credit, buys and 
sells credit. For the purposes of the banker there are two 
kinds of credit : 1. Demand credit — that which is due at 
such time as it may be presented for payment, and which 
bears no interest. 2. Time credit — credit that bears in- 
terest (interest being proportionate to the amount of money 
promised, the length of time that payment is delayed, and 
the rate agreed on). The chief function of the bank is that 
of furnishing to business men a kind of funds that will 
pass current, such credit as will be received in exchange 
in lieu of money — that is, as "cash. " The business com- 
munity needs current funds — currency. Under more anti- 
quated systems of business, money served the need for cur- 
rency in exchange. The bank offers a form of currency 
that will serve them better than money. It offers bank 
credit — its own promise to pay money on demand. 

Equipment of bank. — To make its promises pass current, 
however, it is necessary to keep enough money on hand to 
assure the public that it can meet all demands outstanding. 
If this is done, if the bank so conducts itself that the busi- 
ness community has confidence in it, if, in the judgment 
of "depositors" and other members of the community, it 
will at all times be able and willing to meet its promises, 
then the superior advantages of using bank credit instead 
of money will cause the community to do nearly all its 
business with the demand promises of the bank. If the 
business public know that they can always get gold in ex- 
change for "bank credit," then the obligation of the bank 
will be considered "as good as gold," the value of the 
credit promises will be equal to the value of the thing 
promised. The bank, therefore, must keep such a stock 



THE COMMERCIAL BANK 241 

of coin (or legal-tender money) in its vaults as will enable 
it at all times to satisfy the public that it is ready to meet 
its promises. The resources that enable the bank at all 
times to retain the money necessary to maintain its 
"credit'" are usually contributed by its stockholders at 
the time of its organization. 

Money reserve. — So long as there is no doubt of the 
integrity and the ability of the commercial bank to pay, 
it will require only a relatively small amount of money to 
meet demands. In the case of Brown's business, his bank 
account may range from $5,000 to $100,000. Here is a 
widely fluctuating credit, to be sure, and if the bank had 
to keep $95,000 in its vaults to insure its ability to meet 
his checks it could profit nothing from serving him. But 
Brown is not its only customer. The bank has several hun- 
dred others. When Brown buys his grain he delivers 
checks to a hundred different farmers and grain-dealers 
that are also customers of the bank. Brown's account is 
simply transferred to others on the books of the bank. 

Ordinary demands for money. — A little gold, or silver, 
or paper money will be drawn out daily to meet the de- 
mands of trade — to make change, perhaps, or to do business 
out in the country, where the people do not know enough 
about the financial standing of business men to be willing 
to accept checks — but in the daily course of trade about as 
much money is collected by merchants and bank customers 
from "outsiders" as is drawn out. This is brought to the 
bank and exchanged again for bank credit. The amount 
of coin actually needed, when public confidence is undis- 
turbed, amounts to but a fraction of 1 per cent of the 
credit currency of the bank outstanding. In times of 
financial disturbance, when public faith is shaken, it has 
been found by experience that if a bank continues to meet 
its obligations as fast as payment is asked, confidence in its 
ability to pay all demands will be restored before 30 per 



242 FUNDS AND THEIR USES 

cent of its outstanding credit has been redeemed. Under 
all circumstances, therefore, it would not be necessary to 
carry in money more than 25 or 30 per cent of its deposits. 

The bank's salable credit. — With $50,000 money capital 
invested by the stockholders, the bank will be able to sell 
from $150,000 to $200,000 of its own credit accounts, and 
will at all times be able to deliver cash on demand. With a 
$50,000 capital held in its reserve a bank could purchase 
by use of its own cerdit — make investments — to the same 
extent that it could, without credit, if it had $200,000 or 
more of gold in its vaults. 

Profits based on investment of credit.— What will the 
bank do with this $200,000 of disposable credit? The 
stockholders have invested $50,000 of money in the bank. 
The bank has $200,000 of disposable credit for investment 
in other things. It is in the disposition of its credit funds 
that it builds up its clientage, renders the highest service 
to the community, finds it own greatest protection, and 
makes the greater part of its income. Let us say that 
Brown sells on the average $50,000 worth of mill product 
per month. Some of this is sold in Chicago, the remainder 
in New York and Liverpool. He deals with first-class 
wholesale houses. But it takes time to deliver goods after 
a sale is made ; then, too, his business arrangement with 
his customers is that bills shall be post-dated — that is, if 
a sale is made on January 20, ten days, perhaps, may be 
allowed after delivery and the bill will be post-dated 
May 1. This is the date upon which it will be due and 
payable. It is also a rule of business with him to allow 
5 per cent discount from the price stated in the bill for 
"cash" on delivery. When Brown has a small stock of 
grain on hand he may be able to meet all the demands of 
his business and at the same time carry such of his cus- 
tomers as do not avail themselves of the 5 per cent dis- 
count. In this case, the miller may be able to get 5 per 



THE COMMERCIAL BANK 243 

cent on the "cash" price for the ninety days' delay. But 
in the fall, when the best milling grains are coming into 
the local market, Brown may find it to his advantage to 
buy a large stock; otherwise it may be shipped out of the 
country, and later he would have to pay Chicago prices 
for his grain, besides freight charges back again. Now, 
having made local purchases of grain, he is not in position 
to "carry" his customers. He therefore goes to his bank 
and enters into an arrangement whereby he is to turn over 
to the bank ' ' bills ' ' against his customers for mill products 
sold ; he makes the bank his agent for collection, and at the 
same time he arranges to borrow from the bank such 
amounts as he may need in his business (not to exceed 90 
per cent of the amount of bills placed in their hands). 
The amount borrowed from the bank is represented by 
Brown 's promissory note payable on or before ninety days, 
with interest at 6 per cent per annum until paid. In other 
words, the bank arranges to sell its credit (a deposit) to 
Brown in exchange for his interest-bearing obligation to 
the bank. That is, Brown has exchanged his own promise 
to nay at a future time for the bank's promises to pay at 
once; but Brown also stipulates that he will pay an addi- 
tional sum to the bank, as interest, in consideration for the 
length of time that his payment is deferred. By keeping 
a money reserve, the bank is able to sell some three or four 
times as much of its "demand credit" (deposits) for the 
"time credit" of its customers (commercial paper) as its 
stockholders had money invested in the bank, and gets an 
income of interest on its "loans" of credit, just as it would 
have done had it ' ' loaned ' ' money instead. In this ap- 
pears the answer to the question, Why does the bank keep 
Brown's account and collect his checks free of charge, be- 
sides doing various other services for him at its own ex- 
pense ? Obviously it is because by so doing it will be able 
to do other business out of which a profit may be realized. 



244 FUNDS AND THEIR USES 

Brown's first deposit may have been created by a sale of 
money to the bank in exchange for ' ' bank credit. ' ' Again, 
it might have arisen from a transfer of the "credit" of 
some one else for "bank credit." In either case the bank 
has gained a business advantage. If money is obtained, 
this adds to the reserve ; if the credit of others, then their 
credit funds are being reduced and new demands created 
for bank credit. The ones from whom the checks were 
received had bought "deposits" These are being ex- 
hausted. More than that, Brown is constantly exhausting 
his own account. When further funds are needed by him 
the bank will be able to sell its credit and make a profit on 
the sale. 

Kinds of investment that a bank may safely make. — 
This raises another question, What kind of purchases may 
a bank make with its credit? Its business is organized to 
serve a class of people engaged in trade and production. 
With them it must deal and out of this service it must 
obtain its profits. But while the bank serves the com- 
munity, it must at the same time serve itself. For the bank 
there are only three kinds of property in which its credit 
may be hrvested with safety and profit while serving the 
industrial community: 1. It may sell its credit (deposits) 
for money. That is, if a merchant or manufacturer has 
taken in money that he may not find convenient for use in 
his business, he deposits it — takes it to the bank and sells it 
for ' ' bank credit, ' ' which he finds more convenient for use 
as "cash." The bank's interest in this exchange lies in 
strengthening its money reserve, thus enabling it to sell 
to its customers some two, three, or four times as much of 
credit, by which sale it makes a profit. 2. It may sell 
its credit for such "securities" and credit rights as it 
may deem necessary to strengthen its reserve, and re- 
lieve it from ..the necessity of carrying a larger sum of 
money. These investments are usually in some form of 



THE COMMERCIAL BANK 245 

low-rate interest-bearing obligations, but which are quickly 
convertible into cash if needed. They may be in the form 
of Government bonds or securities that may be realized 
on at any time in the open market without loss of principal 
invested, and at the same time bring in a small current in- 
come. The}^ are usually deposits in other banks (as with 
reserve agents ) or in the form of ' ' call loans on collaterals ' ' 
— investments that may be realized on at once, investments 
that usually bear a low rate of interest, but which grow 
out of commercial transactions. 3. It may sell its credit 
for commercial paper — the short-time inter est -hearing or 
discountable credits that arise in the course of the business 
of its customers. The manufacturers and merchants of a 
community are constantly selling goods "on time." They, 
however, sell at such a margin of profit that, in case funds 
are need in their own business, they may dispose of the 
bills at a discount, convert them into "cash, " and pur- 
chase their stock for manufacture and sale rather than hold 
the accounts for final payment with interest. Their busi- 
ness is that of production and sale of goods. Credit in a 
form which may be- used as "cash" to them is only one 
kind of "working capital" employed in the equipment of 
their business for larger profits. Credit to the merchant 
and manufacturer is a convenient means of exchange; it 
is out of the exchange that their profit is to come, and not 
from the income in the form of interest on deferred pay- 
ments. The bank, on the other hand, is organized for the 
purpose of making a profit on the purchase and sale of 
credit ; but the only kind of high-rate interest-bearing 
credit that it may safely handle and at all times maintain 
its own stock unimpaired are the short-time obligations of 
its customers. The observance of this principle is a condi- 
tion necessary to success. This is imperative, on account 
of the opportunity which is thus afforded the bank to press 
for payment claims which may become doubtful through 



246 FUNDS AND THEIR USES 

the shifting fortunes of business. It is also to its advantage 
to maintain a constant flow of payments from its commer- 
cial credit assets due as a means of protecting its money 
reserve in case this is at any tim? threatened by those who 
hold deposit accounts. 

According to the report of the Comptroller of the Cur- 
rency, September 8, 1920, the capital stock paid in by the 
8,093 National banks amounted to $1,248,271,000. The 
amount of money reserve actually held at that time, in- 
cluding cash in vaults was $2,195,043,000. But besides the 
capital stock paid in, there were of surplus $996,928,000 
and of undivided profits $459,139,000, a total fund of 
$2,704,338,000. It appears, therefore, that 81.1 per cent 
of the funds contributed and owned by the shareholders 
of the banks were actually held as money reserves, while 
against these money reserves there were outstanding of 
demand, time and Government deposits, including deposits 
to the credit of banks and bankers, $16,751,956,000. There 
were, besides, National bank-notes outstanding to the sum 
of $693,270,000. The credit sold by these banks then was 
over $16,000,000,000, or about eight times the amount of 
money reserve actually held. Compare these figures with 
similar statistics for the year 1899. 

According to the report of the Secretary of the Treasury 
for 1899, the amount of capital stock paid in by the 3,595 
National banks (September 7) was $605,772,970. The 
amount of money reserve actually held at that time was 
$487,524,937. But besides the capital stock paid in there 
were $248,449,235 of surplus and $102,066,430 undivided 
profits — a total capital fund of $956,288,635. It appears, 
therefore, that an average of only 51 per cent of the capital 
funds were actually held in money reserves, while against 
this money reserve there were outstanding $2,450,725,598 
of individual deposits, and about $1,000,000,000 of deposits 
in other banks, $414,000,000 of the latter being with author- 



THE COMMERCIAL BANK 



247 



ized reserve agents. There were, besides, some $200,000,000 
of National bank-notes outstanding. Assuming that $400 r 
000,000 of the deposits in other banks were drawing in- 




Fig. 107. — Interiob of Large Commercial Banking House. 

terest, the credit sold by those banks from which an income 
was derived was over $3,000,000,000, or about six and one- 
half times the amount of money reserve actually held. 



248 FUNDS AND THEIR USES 

The increase in the margin of bank credit sold above 
reserve held by the banks against these credits is explained 
by the greater facility of using the banking reserve which 
has been afforded by the new banking system. It would 
not have been safe in 1899 to lift credit to the levels 
attained in 1920. It now is safe because the banking 
reserve of the country is adequately protected, as we shall 
see, in the Federal Reserve banks, and is effectively 
mobilized for instant use in case of emergency. 

The income -producing investments of the National banks 
made in exchange for their own credit (deposits and notes) 
were on September 8, 1920, as follows : 

Commercial paper (loans and discounts) $12,415,762,000 

Deposits in other banks on interest (estimated) 1,424,223,000 
United States bonds 2,175,019,000 

Total $16,015,004,000 

If we may assume that the commercial paper averaged 5 
per cent — it actually averaged higher than this in that 
year — United States bonds 3 per cent, and interest on de- 
posits in other banks 2 per cent, then the total annual in- 
come on these investments would be: 

Commercial paper $620,788,100 

Interest on bonds 62,250,570 

Deposits in banks on interest 28,484,460 

Total $711,523,130 

As stated before, the bank's income is not confined en- 
tirely to sales of its own credit. Besides being an investor, 
the banker is a merchant and broker — dealing in bullion, 
coin, bills of exchange, bonds, and securities. He is also 
an agent for the collection of bills and notes. He may 
likewise be a trustee. All of these functions, however, have 
to do with money and credit in their uses as capital — with 
the financial operations and activities involved in the pur- 



THE COMMERCIAL BANK 249 

chase and sale of goods; out of them all comes the gross 
income of the bank, from which are to be obtained its ex- 
penses and profit. 



BIBLIOGRAPHY 

Cleveland, F. A., The Bank and the Treasury, Chapters vi, xiv. 

Dunbar, C. F., and 0. M. W. Sprague, The Theory and His- 
tory of Banking, Chapters i, ii, iii. 

White, Horace, Money and Banking, Book III, Chapters i, ii, 
iii, iv, xiv, xvii, xviii, xix. 



CHAPTER XI 

THE FEDERAL RESERVE SYSTEM AND OTHER AIDS 
TO COMMERCIAL BANKING 

Early banking regulation. — 'We have seen that in 1847, 
there was established the Independent Treasury system ; 
but this contributed little if anything to help the banking 
situation : it merely removed the Government funds out of 
the danger to which they had been exposed when deposited 
in the unregulated State banks The first effort properly 
to regulate the commercial banks of the country was 
made in Massachusetts under the famous Suffolk banking 
system, in which note issues of banks in New England 
were discriminated against if they were not promptly re- 
deemed when properly presented. This was the great evil 
of the banking situation in those days — the irresponsible 
issue of bank-notes. A few years later in New York an 
important innovation came with the Free Banking Law 
of 1838, a State regulation which protected bank-notes, by 
requiring the deposit of specified bonds with the State 
Comptroller. These bonds were pledged to the payment 
of the notes, in case the bank issuing the notes failed to 
pay them. The law became a model for our national sys- 
tem inaugurated twenty-five years later. 

The National banks. — This National system came into 
existence largely as a war emergency measure: it was to 
provide both a regulated and uniform National currency 
and a market for Government bonds. With these objects 
in view the law of 1863, which was revised and rewritten 
in 1864 under the direction of Comptroller Hugh McCul- 
loch, provided for the organization throughout the coun- 

250 



AIDS TO COMMERCIAL BANKING 251 

try of National banks, that is to say, banks operating under 
a Federal charter. These banks were compelled to pur- 
chase certain amounts of Government bonds, the bonds to 
be deposited, at the discretion of the banks' officers, with 
the Comptroller of the Currency, an official of the Treasury 
Department at Washington ; and National bank-notes could 
then be issued by the bank in similar amounts. At any 
time the bank could enlarge its currency by buying addi- 
tional Government bonds and depositing them with the 
Comptroller. Under the initial law, the volume of notes 
put out was limited to 90 per cent of Government bonds 
deposited and to a maximum amount for any one bank; 
but these limitations later were removed. A 5 per, cent 
redemption fund was required to be kept at Washington 
by each bank, for the purpose of facilitating the payment 
of these notes in legal money. 

National banking system inadequate. — Although this 
banking system hardly began to function until after the 
exigency of the war, to meet which it was created, was 
over, it continued to be our commercial banking system 
for the following half century, being replaced exactly fifty 
years later, in 1913-14, by the Federal Reserve system. 
During that fifty years the National banks were subjected 
to periodic financial strains which disclosed many weak- 
nesses. Repeated banking crises during the last half of the 
nineteenth century brought vividly to the attention of 
bankers these defects. Especially important were the 
panics of 1873, 1893 and 1907 in bringing to light the 
weaknesses of the system. But no legislative steps were 
taken to remedy the unsatisfactory conditions until after 
the disaster of 1907. As a result of this financial crisis, 
there was a widespread protest among business men de- 
manding legislation which had long ago been recommended 
by the best banking interests of the country. It was plain 
that the National banking systeri under which American 



252 FUNDS AND THEIR USES 

banking had developed since the Civil War was both de- 
ficient and inadequate for the developing of financial and 
industrial needs of the nation, now three times as large 
in numbers and immeasurably more wealthy than when the 
system was first inaugurated 

The weakness of the old National banking system should 
be well understood in order properly to appreciate the out- 
standing features of our present Federal Reserve system. 

The dual system of banks. — One of the most important 
evidences of weakness was the existence of a dual system 
of banks, the National banks on the one hand and the 
State banks and trust companies on the other. There was 
no manner in which State banks and trust companies could 
be brought into alignment with the conditions imposed 
upon National banks, excepting they changed their char- 
acter outright and became National banks. There was 
little incentive to do this because of the laxness of State 
regulations as compared with the National banking law. 
State banks and trust companies could do a much wider 
range of business with a lower capital requirement and a 
smaller reserve. Nor were their operations limited to the 
strict commercial field ; they could loan on real estate 
mortgages, and were thus in a better situation to accom- 
modate a large section of the agricultural population than 
were the National banks. 

Inadequacy of reserves. — But more especially was the 
growth of trust companies in the commercial centers a 
danger to the conservative National banks. Between 1885- 
1910 there was an extraordinary increase in the number 
of trust companies. The report of the Comptroller of the 
Currency shows that the resources in millions of dollars of 
trust companies was $4,216,000,000 in 1910 as contrasted 
with $248,000,000 in 1885. Perhaps the most marked 
period of growth came in the last decade of that period, 
between 1900 and 1910, when the resources increased from 






AIDS TO COMMERCIAL BANKING 253 

$1,330,000,000 to $4,000,000,000, Coincident with this 
marked growth in trust companies ' business was a tendency 
for certain of these important institutions in New York 
City to engage in unsound banking practices. The pro- 
portion of cash to individual deposits was only 4.9 per cent, 
in 1907, for the trust companies ; and this was far below c 
reasonably safe minimum. What these trust companies 
were doing was to deposit large sums of money with the 
National banks in New York City, relying upon those 
balances for a reserve in case a crisis should arise. But 
the National banks of New York City at that time, at 
least a large number of them, did not entertain adequate 
notions of their responsibility — as guardians of the bank- 
ing reserve of the other banks. They carried their cash 
reserves far too low for safety and very little above the 
minimum required by law. In 1906 the cash reserve of 
the New York banks was only $224,000,000 against de- 
posits amounting to $1,162,000,000, of which a large pro- 
portion was in bankers' balances. With the Federal law 
requiring a 25 per cent reserve, these New York banks 
were plainly not in a position to meet any heavy with- 
drawals during a crisis. 

The panic of 1907. — Such a crisis arose in 1907. The 
National banks of New York, where the funds of these 
trust companies as well as the reserve funds of National 
banks throughout the country had accumulated, were sud- 
denly subjected to the withdrawal of very large sums of 
money. This condition had been precipitated upon the 
banking world by the reckless operations of certain large 
trust companies in New York, which were closely associ- 
ated with some of the National banks. A money panic of 
alarming proportions followed, and in its wake the usual 
period of business depression. It is assumed that no bank- 
ing system can eliminate the so-called "business cycle,' ' 
which culminates in the periodic crisis; but an adequate 



254 FUNDS AND THEIR USES 

banking- system can do away with the disastrous financial 
panic, which was characteristic of these business crises in 
the United States. Foreign banking systems had already 
largely done away with such panics. 

The strain on the New York bank reserves. — -Now, 
under our old banking system there were two or three 
features, which more than anything else contributed to the 
weakness of the system. In the first place, the reserve 
held by the banks against deposits was fixed by statute at 
25 per cent of demand deposits. But part of this 25 per 
cent reserve, in the case of banks outside of New York 
City, could be kept in the form of bankers ' balances in New 
York City. Similarly part of the 25 per cent reserve of 
banks in smaller towns and inconsiderable cities could be 
kept in the National banks of the larger cities, such as 
Chicago and Boston and Philadelphia. The weakness of 
this ' ' feature ' ' lay in the fact that these National banks in 
the larger cities, particularly in New York, could place 
75 per cent of these reserves in profitable loans, and were 
in a habit of doing so, leaving a bare 25 per cent of these 
reserve funds in actual cash in the bank vaults. Thus, 
when any untoward incident caused depositors to demand 
money in large volume, the banks throughout the country 
drew out their accounts from the New York banks and 
from the larger city banks, confronting these New York 
banks with the problem of turning into cash 75 per cent of 
banking reserves that they had lent. This could not be 
done. The alternative was to close the doors of the New 
York banks, which was what happened in 1907 and to a 
lesser degree in 1893. That was equivalent to admitting 
insolvency; but it was " respectable ' ' insolvency, because 
practically all of the banks did it. 

Inelasticity of the National bank-notes. — In the second 
place, the only currency in existence other than the cur- 
rency issued by the United States Treasury was the Na- 



AIDS TO COMMERCIAL BANKING 255 

tional bank-note currency. This, as we have seen, was 
issued upon the deposit with the Comptroller of the Cur- 
rency of United States bonds. It was supposed to be an 
1 ' elastic ' ' currency, that is, to expand to meet the demands 
of the season or of the business cycle, and to contract when 
those seasonal and cyclical demands were over. But it can 
easily be seen that a currency so constituted could not 
meet these requirements. Whether or not a National bank 
issued National bank-notes depended upon the market price 
of United States Government bonds, and not upon the 
seasonal demands of business. For instance, between 1884 
and 1890 there was a marked contraction of the National 
bank-note currency, due to the fact that in that period 
the price of United States Government bonds rose to a 
point above par; and it became profitable for the banks 
to sell Government bonds at a price which yielded a hand- 
some profit. But with the sale of the bonds there went 
automatically a contraction of the bank-note currency, 
which obviously had no direct relation whatever to the de- 
mands of business. The fact is that that contraction of 
the currency came at a time which would normally have 
expected an increase in the currency. 

Absence of rediscount system. — These two defects, the 
rigidity of the reserve and the inelasticity of the bank- 
note currency, were closely connected with and partly re- 
sponsible for a third defect. What the commercial bank- 
ing system needed was a large reserve of cash, held intact 
at all times, and immediately available for the use of the 
banks. The independent character of the National . banks 
together with the rigid requirement of a 25 per cent mini- 
mum reserve and the incapacity of our bank-note currency 
properly to expand and contract at the call of business de- 
mands precluded the possibility of thus effectively mobiliz- 
ing the reserve. It was necessary to devise some system 
which would protect the banking reserve of the country 



256 FUNDS AND THEIR USES 

and at the same time make it possible for the banks to 
turn their assets into cash in times of emergency. This 
could be brought about only through the establishment of 
a rediscount system, such as had obtained in England for 
years. 

The Aldrich-Vreeland Act. — A temporary law was 
enacted to tide over the needs of the banking world until a 
thorough investigation of banking systems could be made, 
and a thoroughgoing and adequate law enacted. The 
Aldrich Commission did exceedingly good work in bring- 
ing together results of the banking systems of the world 
and, although the banking system specifically introduced 
by this Commission was not immediately adopted, still its 
work was ultimately made effective in the Federal Reserve 
Act approved December 23, 1913. 

The Federal Reserve districts. — The United States is 
divided into twelve major financial districts corresponding 
roughly with the industrial, commercial and agricultural 
districts. Each of these districts has one Federal Reserve 
bank and as many branch banks as are needed. At present 
there are 23 branch banks in operation. All National banks 
are compelled to enter the system and State banks and 
trust companies are strongly urged to do so. 

Capital of Federal Reserve banks. — The Federal Re- 
serve banks must have an initial capital of $4,000,000. This 
capital is obtained from member banks, who are required 
to subscribe an amount equal to 6 per cent of capital and 
surplus. Up till now, however, only 3 per cent has been 
called for, and it is very doubtful whether the other 3 per 
cent will ever be called. In the event that the 6 per cent 
member-bank subscription was not enough to make up the 
$4,000,000 capital required in each district, the additional 
amount needed by a Federal Reserve bank was to be ob- 
tained by offering shares for sale to the public. If there 
was still insufficient capital, the United States Government 



258 FUNDS AND THEIR USES 

was to provide enough to make up the $4,000,000. It did 
not become necessary to resort to either of these expedients. 
The capital stock of the Federal Reserve banks may be 
increased or decreased by increases or decreases in the cap- 
ital stock of member banks or by the entrance into or retire- 
ment from the system. 

The shareholders of the Federal Reserve banks are ' ' held 
individually responsible equally and ratably ' ' for all con- 
tracts and debts of the bank to the extent of the par value 
of their stock subscription. Stock held by others than 
member banks has no voting power. All transfers of Fed- 
eral Reserve bank stock are governed by the Federal Re- 
serve Board. Provision is made for the withdrawal of 
State banks and trust companies. 

Each member bank must make reports to its Federal 
Reserve bank and be subject to examinations by the Fed- 
eral Reserve Board. As a matter of fact, where the laws 
for State examinations of banks are essentially similar to 
those provided by the Federal Reserve Board, these State 
examinations are accepted. 

Directors of the Federal Reserve banks. — Each Federal 
Reserve bank is incorporated for a period of 'twenty years 
and is given the usual powers of a corporate body. Each 
Federal Reserve bank is managed under the supervision 
and control of a board of directors. This board consists 
of "nine members holding office for three years and divided 
into three classes, designated classes "A," "B, " and "C." 
Each class has three members. Class A and Class B direct- 
ors are chosen by the member banks. The directors of 
Class B are chosen to represent the distinctive commercial, 
agricultural and industrial activities of the district. Class 
C directors are appointed by the Federal Reserve Board 
and thus expected to represent the public. One of the 
Class C directors is appointed chairman of the board of 
directors. He also acts as the agent of the central board 



AIDS TO COMMERCIAL BANKING 259 

at Washington, with the title of Federal Reserve agent. 
The Federal Reserve Act provides that the directors shall 
have ample acquaintance with the financial needs and prac- 
tices of their Federal Reserve district The Federal Re- 
serve agent is the direct representative of the Federal Re- 
serve Board and maintains a local office usually on the 
premises of the Federal Reserve bank. He is, however, 
paid by the Federal Reserve bank. Provision is also made 
for deputy-chairman and assistant reserve agents. There 
is a governor of each Federal Reserve bank and a deputy 
governor elected by the board of directors. The governor 
is the executive head of the institution. 

Earnings of the Federal Reserve banks. — Stockholders 
are entitled to an annual dividend (cumulative) of 6 per 
cent on their paid in capital stock. After such dividends 
have been paid, provision is made for a surplus fund which 
shall amount to 100 per cent of the subscribed capital 
stock of each bank. Each year 10 per cent of the earnings 
is transferred to the surplus account. All funds over the 
surplus requirements revert to the Government as a 
franchise tax. These Government funds in turn are to be 
used as a part of the gold reserve held against outstanding 
United States notes or applied to the reduction of the 
bonded indebtedness of the United States. 

The Federal Reserve Board. — The Act provides for the 
establishment of a Federal Reserve Board consisting of 
seven members, which include the Secretary of the Treas- 
ury and the Comptroller of the Currency, acting in ex- 
officio capacity, while the other five members are appointed 
directly by the President of the United States with the 
advice and consent of the Senate. In the selection of ap- 
pointees the President is required to have the various com- 
mercial, industrial and geographic divisions of the country 
duly represented on the Board. The ordinary term of each 
member is ten years. Two members must be persons with 



260 FUNDS AND THEIR USES 

experience in banking- or finance. Two members are ap- 
pointed as governor and vice-governor, respectively, of 
the Board. In 1922 an additional member was provided 
for, who should represent agricultural interests. 

Powers of the Federal Reserve Board. — The Federal 
Board has very wide and ample powers for the control of 
the whole system, especially so in times of crises. Some of 
the more important powers are the following : control over 
examinations, control over the discounting of commercial 
paper of one Federal Reserve bank by other Federal Re- 
serve banks, the suspension of reserve requirements, the 
regulation of Federal Reserve note issues, the providing of 
safety for securities in the hands of State agents, and the 
granting of trust powers to National banks, wherever the 
local banking law permits. 1 

Federal Advisory Council. — An Advisory Council is pro- 
vided for in the Act to consist of a representative banker 
from each of the twelve districts. These counselors are ex- 
pected to meet from time to time and to confer or advise 
with the Federal Reserve Board. 

Rediscounting agencies. — The Federal Reserve Act con- 
stitutes the Federal Reserve banks as central rediscounting 
agencies for member banks. This system of rediscounting 
provides the means for the quick mobilization of loanable 
funds from one part of the country to another, and more 
locally, from one place to another within the same dis- 
trict. The Act specifies that the standard for the commer- 
cial paper which the banks may rediscount shall be deter- 
mined by the Federal Reserve Board. The Act also im- 
poses the following requirements : all paper must arise "out 
of actual commercial transactions" and must be "drawn 
for agricultural, industrial or commercial purposes." All 
paper must have a maturity of not more than ninety days, 

1 Notb:. — Previous to the establishment of the Federal Reserve 
System, National banks were not allowed to do a trust company's 
business. 



AIDS TO COMMERCIAL BANKING 261 

except that drawn for agricultural purposes, which is 
allowed to run for six months. Further, the paper must 
be two-name paper — that is, must have an indorser besideg 
the maker of the note, draft or bill of exchange. 

Before this system was put into operation, discounting 
of commercial paper, as we have seen, had limited scope. 
Banks were forced to limit their loans on commercial 
paper, for they had no stable reserve or reservoir of funds 
to call upon. The larger banks, of course, had the deposits 
of the smaller banks, but these could be withdrawn at quick 
notice. As it is now, member banks can go much further 
than previously in loaning funds on behalf of commercial 
paper. When their own funds are lowered by demand for 
loans, they are able to turn to the Reserve bank which has 
mobilized available funds from other parts of the same 
district or from other Federal Reserve districts. 

Since business is seasonable and the nation's indus- 
tries are so widely diversified, the credit needs of various 
parts of the country do not coincide in regard to time. 
Therefore, the temporarily idle funds of the Kansas City 
Federal Reserve bank may be used to carry the credit load 
of the Boston Federal Reserve bank. At another period 
the Boston Federal Reserve bank may be able to help 
finance business within the territory of the Richmond Fed- 
eral bank. The Federal Reserve Board has the power to 
require one Federal Reserve bank to buy the commercial 
paper of another Federal Reserve bank. 

In the event that a Federal Reserve bank has funds 
available which are not needed for the rediscounting of 
paper presented by member banks, the Federal Reserve 
bank is empowered to buy such paper in the open market. 
Reserve banks may deal in gold coin and bullion, buy and 
sell public securities, open accounts with other Federal 
Reserve banks and with banks in foreign countries. 

Government fiscal agent. — As stated in Chapter IX, the 



262 FUNDS AND THEIR USES 

Federal Reserve banks are given a great many of the func- 
tions of the Independent Treasury system, Sub-Treasury 
functions having been taken over by the Federal Reserve 
banks. Thus together with the United States Treasury, 
the Federal Reserve system is assuming the role of fiscal 
agency of the Government. In this capacity it performed 
exceedingly valuable work for the Government during the 
war in the sale of Government securities. The Federal Re- 
serve banks, under the Act, are made depositories of Gov- 
ernment funds. 

Note issues. — Two new types of note issues are provided 
for under the Act — Federal Reserve notes and Federal Re- 
serve bank-notes. The latter are expected to take the 
place, to some extent, of the National bank-notes under the 
old system. They are similar to the National bank-notes 
except for the fact that they are issued only by the Fed- 
eral Reserve banks. The National bank-notes also continue 
to be issued. 

Federal Reserve notes. — The Federal Reserve notes con- 
stitute one of the most important changes introduced by 
the Federal Reserve system. As noted above, there was no 
elastic currency under the National Banking Act of 1863 
and 1864 : the National bank-notes did not possess this 
quality of elasticity. In order to provide a currency which 
would be really elastic, the new Act made certain specified 
kinds of commercial paper acceptable as a pledge for the 
security of Federal Reserve notes. For example, the Fed- 
eral Reserve bank of the first district in Boston has on 
deposit with the Federal Reserve agent, resident at the 
bank, $134,747,000 in gold; the bank also has given into 
the custody of the Federal Reserve agent securities in the 
form of high-grade, two-name commercial paper, public 
securities, such as Government, State, and municipal bonds, 
or other securities specified by the Federal Reserve Board 
at Washington as "eligible," to the value approximately 



AIDS TO COMMERCIAL BANKING 263 

of $291,196,000. The bank has issued its own notes, Fed- 
eral Reserve notes, to an equal amount, $291,196,000. In 
this instance, therefore, the Boston Federal Reserve bank 
has behind its note issue 55 per cent reserve in gold, be- 
sides the pledge of collateral security to guarantee the final 
payment of these obligations. Moreover, under the law, 
these Federal Reserve notes are a direct obligation of the 
United States Treasury. The willingness of the public to 
accept for general use this form of currency became soon 
apparent ; and during the seven years, in which the Federal 
Reserve system has been in operation some $3,345,000,000 
of Federal Reserve note currency has been in circulation 
at one time. The volume of Federal Reserve notes rose 
rapidly during the years between 1917 and 1920, due to 
the terrific demands for additional currency during the 
period of the war, and the two years of speculative busi- 
ness activity succeeding the war. During the year 1921- 
1922 there has been a steady decline in the volume of these 
Federal Reserve notes in circulation — from the high point 
in December, 1920, of $3,345,000,000 to approximately 
$1,800,000,000 in April, 1922. This elasticity of the Fed- 
eral Reserve notes is clearly indicated also by the changes 
in volume of such currency, issued by any one of the Fed- 
eral Reserve banks taken alone. For example, the Boston 
Federal Reserve bank shows a stretching of the Federal 
Reserve note currency from $19,000,000 in 1918 to more 
than $300,000,000 in the last part of 1920, and a contrac- 
tion from that point to $200,000,000 in the spring of 1922. 
This expansion and contraction corresponds very nearly 
with the great upward movement of business, reaching its 
culmination in the business crisis of 1920, and with the 
long period of business depression which has followed. 
.Active business meant a greater demand for currency, and 
the currency was forthcoming ; fewer business demands 
meant a falling off in the demand of currency and the vol- 



264 FUNDS AND THEIR USES 

ume of currency has fallen off. This is what is meant by 
elasticity of the currency. A similar elasticity can be 
observed in the expansion of the Federal Reserve note cur- 
rency during certain seasons of the year, when the demands 
are heavier than in other seasons. Take, for instance, the 
experience of the Boston Federal Reserve bank, again. 
Here it appears that during the fall and the winter the 
demands for cash are heavy, and during those seasons of 
the year the expansion of the Federal Reserve note cur- 
rency tends to reach its maximum. Thus the new system 
has provided the form of currency which was needed. The 
volume of this currency is now greater than that of any 
other form in use in the United States, exceeding by over 
a billion dollars the volume of National bank-notes in cir- 
culation, and greatly exceeding the volume in circulation 
of United States notes and silver certificates. 

Fully to understand the nature of this elastic medium of 
exchange, let us run through hurriedly the process of issue 
and redemption. The mechanism by which this is accom- 
plished is made up of the Federal Reserve agent, the Fed- 
eral Reserve bank, the Federal Reserve Board and the 
Comptroller of the Currency. The Federal Reserve agent, 
having received authority from the Federal Reserve Board, 
goes to the Comptroller of the Currency, and from him 
receives Federal Reserve notes, which he issues to his own 
Federal Reserve bank. The notes are then paid out to 
member banks in the district. In practice, the mechanism 
works almost instantaneously, since the necessary steps for 
issue are taken ahead of time, so that, if a member bank 
brings rediscountable paper for deposit to the Federal 
Reserve agent, Federal Reserve notes are delivered at once 
upon request. The process of issue is almost automatic. 
During times of business activity, the member banks tend 
to increase their demands for these notes, and there is con- 
sequently an expansion in the circulation of this form of 



AIDS TO COMMERCIAL BANKING 265 

currency The Federal Reserve notes given out over the 
paying teller's counter come into the hands of the public 
for general use as a medium of exchange. 

The circulation having thus expanded, the question now 
is, How does contraction of this currency occur? The 
notes have a distinct homing power ; they tend to return 
to the banks issuing them Those institutions which find 
that the currency in their tills is piling up in quantities 
more than adequate for their needs, send batches of Fed- 
eral Reserve notes back to the Federal Reserve bank, or, if 
not a member of the system, to some correspondent who is 
a member. The correspondent, in turn, will bring for 
credit to the Federal Reserve bank any surplus of these 
notes which it thus acquires. The Federal Reserve bank 
itself may not reissue notes of other reserve banks; they 
may issue again their own notes, but they will not do so 
unless the demands of business, which come to them through 
the requirements for currency of the member banks, indi- 
cate a need for a larger medium of exchange. It thus ap- 
pears that Federal Reserve notes naturally come back to the 
bank of issue, where they are stored until further needs 
develop, or destroyed if worn out and defaced and there- 
fore unfit for further use. As is indicated above, the expe- 
rience of the years 1915 to 1921 gave positive proof of the 
actual performance of this mechanism for the expansion 
and contraction of the currency to meet the demands of 
commercial conditions. 

Mobilization and protection of reserves. — As to the pro- 
tection of banking reserves and the mobilization of those 
reserves, which we have seen were features lacking in our 
old banking system, there is now the requirement imposed 
upon each of the twelve Federal Reserve banks of a 35 
per cent reserve in legal money against deposits in the 
bank. These deposits come chiefly from two sources, the 
deposit of Government funds by the Secretary of the Treas- 



266 FUNDS AND THEIR USES 

ury, and the deposits of the member banks of the district. 
Each member bank is compelled to keep its reserve as a 
deposit in the Federal Reserve bank. In this way the entire 
banking reserve of the country is brought together in the 
several reserve banks, and is protected by compelling those 
reserve banks to keep 35 per cent of those deposits in the 
bank 's vaults. Furthermore, any one Federal Reserve bank 
may find itself pressed by the demands of its member banks 
in times of financial strain ; and, if this occurs, it may bor- 
row funds from other Federal Reserve banks. In this way 
the entire banking reserve of the country is made available 
for the use of those sections where it may most be needed. 
This is what we mean by "mobilization of the reserve." 
Such mobilization has proven to be adequately provided 
by our Federal Reserve system. 

Rediscount. — The Federal Reserve banks furthermore, 
provide a rediscount market for the commercial banks. 
Certain classes of commercial paper designated by the 
Federal Reserve Board at Washington are eligible for 
rediscount, that is to say, for purchase by the Federal 
Reserve banks. For example, in the first district, the 
Federal Reserve bank of Boston on December 30, 1920, 
held $161,968,000 's worth of rediscounted bills. About 60 
per cent of these were commercial bills; the rest were bills 
secured by Government war obligations. The advantage 
of this rediscount market consists in providing a means by 
which a commercial bank, a member of the Federal Reserve 
system, can turn its assets into cash. The National bank 
of New Bedford finds it convenient to convert some of. the 
promissory notes which it holds into available funds. These 
notes might not be due for thirty or sixty days. The bank 
could take such notes, properly indorse them, and sell them 
to the Federal Reserve bank of Boston in return for a 
deposit account at that Federal Reserve bank. This re- 
discount process was not possible under our old system, 



AIDS TO COMMERCIAL BANKING 267 

because there were no banks which were willing to pur- 
chase in any volume of commercial paper held by other 
banks. But under the new system a bank which needs to 
enlarge its available funds can take to the Federal Reserve 
bank of its district commercial paper which has yet two 
months to run before maturity, and procure funds by con- 
verting that paper into a deposit at the Federal Reserve 
bank. The Federal Reserve bank then holds th'e commer- 
cial paper until the time it is paid. 

Thus the present system provides a protected banking 
reserve, a mobilized banking reserve, an elastic currency, 
and a rediscount market, none of which existed under our 
old banking system, and for which there was urgent need 
to protect our banks against the disasters which had pre- 
viously befallen them in periods of business crises. No 
more thorough test could have been given a banking sys- 
tem than was provided by the demands put upon our Fed- 
eral Reserve system in the years 1917-21. 

Intradistrict clearing through the gold-settlement fund. 
— One of the important functions of the Federal Reserve 
system is the intradistrict clearing plan, operated by the 
Federal Reserve banks in connection with the Federal Re- 
serve Board and the United States Treasury. This plan 
is based on the establishment of the gold-settlement funds. 
In May, 1915, the Federal Reserve Board put into operation 
this plan, the principal features of which are : each Fed- 
eral Reserve bank keeps in the United States Treasury 
$1,000,000 in gold, plus an amount equal to its net indebt- 
edness to all Federal Reserve banks. Each bank is then 
required to pay gold into this fund from time to time, as 
much as is necessary to maintain its balance at $1,000,000. 
Those banks which find their balances with the Treasury 
accumulating to an amount above the million dollar point 
may draw out the excess. The Federal Reserve Board 
keeps a set of books, in which there is an account with each 



268 FUNDS AND THEIR USES 

Federal Reserve bank, indicating the amount of gold to 
the credit of each bank. The gold sent for this fund is 
received by the Treasury and certificates issued to the Fed- 
eral Reserve Board representing the amounts so received. 
These certificates are kept by the Federal Reserve Board, 
in vaults in the Treasury, especially set apart for the use 
of the Board. Each Federal Reserve bank is required to 
keep accounts showing the amount due the other Federal 
Reserve banks and the amount due it from the other Fed- 
eral Reserve banks. The method of making settlements 
through this fund is a simple matter of debiting the ac- 
count of one bank and crediting the account of another on 
the books of the Federal Reserve Board at "Washington. 
Thus at the close of the day on Wednesday, May 19, 1915, 
each Federal Reserve bank wired the Federal Reserve 
Board the amounts which it owed to each of the other Fed- 
eral Reserve banks. The next day the agent, appointed by 
the Federal Reserve Board to make settlements, telegraphed 
each Federal Reserve bank the amounts credited to it and 
the amounts debited against it in settlement, according to 
the telegraphic reports of the previous day. Not later than 
three days after these advices, each Federal Reserve bank 
is required to send sufficient gold to cover any debit in its 
gold settlement fund resulting from this transfer. On 
May 20, 1915, the day the first settlement was made under 
this system, $18,450,000 was remitted by the banks to 
maintain their respective quotas. 

Transfer of funds between Federal Reserve banks. — 
It is also possible for Federal Reserve banks to transfer 
excess balances in the gold fund to other Federal Reserve 
banks. This may be done either by telegraph or by letter 
to the Federal Reserve Board. Thus, for instance, on June 
24, 1915, the first transfer of this kind was made by the 
Federal Reserve bank of San Francisco, which, in this 
way, sent $200,000 to the Federal Reserve bank of Boston. 



AIDS TO COMMERCIAL BANKING 269 

That is to say, the San Francisco Reserve bank notified the 
Federal Reserve Board at Washington to debit its account 
to the extent of $200,000 and to credit the account of the 
Boston Federal Reserve bank to the extent of $200,000. 

Federal Reserve agents' fund. — In connection with the 
issue of Federal Reserve notes, a very large sum of gold 
necessarily accumulates in the hands of Federal Reserve 
agents, since the law requires that 40 per cent of Federal 
Reserve notes issued be covered by a deposit of gold with 
the Federal Reserve agent at the bank issuing. An ar- 
rangement was made in the fall of 1915 by which the Fed- 
eral Reserve agent at each of the twelve banks opened an 
account with the Federal Reserve Board at "Washington, 
and sent to the Board part of the gold fund in his posses- 
sion. The object of this arrangement was to make easy 
the transfer of gold by a Federal Reserve bank to its agent 
whenever Federal Reserve notes should be issued. Thus 
the Federal Reserve bank of Atlanta, on September 8, 
1915, directed the payment of $2,500,000 to its Federal 
Reserve agent. This payment was made by the simple 
process of shifting items on the books of the Federal Re- 
serve Board. This amount was credited to the account of 
the Federal Reserve agent of Atlanta, and debited to the 
account of the Federal Reserve bank of Atlanta. It has 
become customary for the Federal Reserve agents to keep 
the bulk of gold in their possession in this manner. The 
amount to the credit of all Federal Reserve agents was at 
the close of the year 1921 well over a billion dollars. Thus 
through the gold-settlement fund kept by the Federal 
Reserve banks, and the Federal Reserve agents' funds, a 
large part of the actual gold supply in the country is kept 
in the vaults of the United States Treasury. 

Intradistrict clearing.-* — Besides this settlement between 
Federal Reserve banks, there is an intradistrict clearing, 
through which member banks within a district pay balances 



270 FUNDS AND THEIR USES 

due each other. The balances kept by member banks in 
their respective Federal Reserve banks are increased either 
by rediscounting of commercial paper or by the collection of 
checks of other banks through the Federal Reserve bank. 
Any of the banks which are members of the system can 
collect checks on other banks by simply sending them to 
the Federal Reserve bank. Here the amount of any such 
check is credited to the account of the bank sending it, 
and debited to the account of the bank on which it is 
drawn. Thus the intradistrict clearing plan has developed, 
banks sending checks drawn on each other to the Federal 
Reserve bank for collection and clearance. 

State banks in the Federal Reserve system. — The Fed- 
eral Reserve system was put into operation in November, 
1914. The provisions of the Act made it necessary for 
National banks to become members of the new system if 
they retained their National charter; and most of the Na- 
tional banks of the country promptly subscribed to the 
stock of their respective reserve banks and thus became 
members of the system. The problem was to induce State 
banks and trust companies to come into the new system, 
for it was hoped from the beginning that the facilities 
offered by the system would result in ultimately doing 
away with the dual system of banking which had been 
such an unsatisfactory feature of our previous banking 
history. The early attempts to encourage State banks were 
opposed, and in some sections very vigorous measures were 
taken to prevent State banks from coming in. For in- 
stance, in some States the reserve requirements for State 
banks and trust companies were lowered after the adoption 
of the Federal Reserve Act for the very purpose of making 
membership in the reserve system seem less attractive. But 
the early opposition to the Federal Reserve system on the 
part of these State institutions subsided, and since the fall 
of 1917 there has been a steady increase in the number of 



AIDS TO COMMERCIAL BANKING 271 

State banks and trust companies joining the system. The 
latest available figures indicate there are 1,595 State banks 
which are members of the Federal Reserve system. These 
banks have together a capital and surplus amounting to 
over a million dollars, and total resources of ten million. 
Thus the early hopes regarding the future of the Federal 
Reserve system seem to be materializing, and there is every 
reason to believe that in the not distant future the Federal 
Reserve system will include a large majority, if not all, 
of the active commercial banking institutions of the 
country. 

Scope of the Federal Reserve system. — The exact posi- 
tion of the Federal Reserve system to-day is most easily 
appreciated by considering the comparative number of 
member institutions and their banking strength. In June, 
1921, the membership embraced 9,741 banking institutions, 
as compared with 30,815, the total number in the country. 
This was 31 per cent of that total. These 9,745 banks pos- 
sess banking capital up to 64 per cent of the entire bank- 
ing capital of the United States, and a similar percentage 
of the surplus and undivided profits. Taking the total 
resources of all the institutions in the country, those be- 
longing to the Federal Reserve system possessed 62.2 per 
cent and they were doing 64 per cent of the loan and dis- 
count business. 

Government institutions providing credit during the 
emergency of the Great War.— During the war, in connec- 
tion with the mobilization of finances, it became necessary 
for the Government to introduce new financial organiza- 
tions to work in conjunction with the Treasury Depart- 
ment. By an Act of April 5, 1918, there was created what 
was known as the War Finance Corporation, as a measure 
to enable the banks to furnish credits essential for indus- 
tries contributory to the prosecution of the war. In the 
words of Secretary of the Treasury, "the Government's 



272 FUNDS AND THEIR USES 

borrowings, particularly during the period immediately 
preceding and following each Liberty Loan, have tended 
to preempt the credit facilities, and even to prevent them 
from giving needed and customary help to quasi-public 
and private enterprises. Many instances have been brought 
to the attention of the Secretary of the Treasury and of 
the Federal Reserve Boards; war industrial plants, public 
utilities, power plants, railroads and others, have found it 
difficult, even impossible, to obtain the necessary advances 
to enable them to perform vital service in connection with 
the war, because essential credits, ordinarily available to 
them, are being absorbed by the Government itself." 



The Federal Reserve system fails to provide for loans on 
corporate stocks and bonds. It does provide for loans 
based on commercial paper, agricultural paper, and paper 
secured by Government obligations; and these provisions 
force the banks to discriminate against loans secured by 
stocks and bonds. It was to supply this need that this War 
Finance Corporation was established. The corporation was 
given power to make loans to banking institutions to 
enable them, in turn, to lend to individuals, firms, or cor- 
porations engaged in industries which contributed to the 
successful prosecution of the war. It also was empowered 
to loan directly to such individuals and corporations; but 
only 12% per cent of the corporation 's capital stock and of 
its bonds could be used in this way, this restriction being 
imposed primarily to prevent the corporation from becom- 
ing an undesired competitor of the banks already estab- 
lished. To start operations, $500,000,000 were put at the 
disposal of the War Finance Corporation. This was done 
by the sale of its capital stock to the Government. It was 
authorized to issue bonds not exceeding $3,000,000,000 ; 
the proceeds from the sale of these bonds was to provide 
funds for further operations. 



AIDS TO COMMERCIAL BANKING 273 

After the war the corporation was continued for the pur- 
pose of loaning money to persons and corporations in the 
United States engaged in exporting, in order to promote 
commerce with foreign nations. During the years imme- 
diately succeeding the war, due to the terrific overstrain 
of credit, financial conditions in Europe were such as to 
fail to provide the funds necessary for any large purchase 
in the United States. Thus the War Finance Corporation 
for a number of years took its place among institutions 
providing credit. 

On August 14, 1917, the Grain Corporation was estab- 
lished by executive order of the President. The capital 
stock of this corporation was increased to $150,000,000 in 
1918. The corporation was to be prepared to purchase at 
a guaranteed price all wheat offered to it, and was author- 
ized to borrow on the security of wheat or flour, which it 
had purchased the funds necessary to finance its opera- 
tions. This was another Government institution active for 
a time in furnishing funds for agricultural enterprises. 

Similarly, the Emergency Fleet Corporation was estab- 
lished. The work of these financial organizations was very 
closely interwoven with the work of important committees 
and commissions, such as the War Industries Board, which 
mobilized the industrial resources of the country for war 
purposes, the Railroad, Food and Fuel Administrations, 
the War Trade Board, the United States Shipping Board, 
the Allied Purchasing Commission, and the Priorities 
Board, all of which, taken together, practically controlled 
the industrial, commercial, and transportation business of 
the country. 

BIBLIOGRAPHY 

Dewey and Shugrue, Banking and Credit, Chapters xxii, xxiii, 

xxiv, xxv. 
Kemmerer, E. W., A B C of Federal Reserve System. (Revised, 

Princeton Univ. Press, 1919.) 



274 FUNDS AND THEIR USES 

Westekfield, R. B., Banking Principles and Practice, Vol. 11, 

Chapters xii, xiii, xiv, xv. 

These chapters give a good general account of .the 

present banking system of the United States. 
White, Horace, Money and Banking, Book III, Chapters 

xvi, xxii. 



CHAPTER XII 

THE TRUST COMPANY 

State banks. — There are two kinds of banking institu- 
tions, other than National banks, doing commercial bank- 
ing business. These are State banks and trust companies. 
The former resemble the National banks, except there are 
differences in requirements for reserve and capitalization. 
In general, State banks can operate with smaller capital 
and a lower percentage of reserve than can National banks. 
If, however, a State bank becomes a member of the Federal 
Reserve system, it must conform to the same restrictions 
respecting reserve as do the other members. The useful- 
ness of the smaller State banks is in their furnishing bank- 
ing accommodation to certain local interests in sections not 
covered by the National banks. The note- issue privilege is 
denied the State banks through the imposing of a ten per 
cent tax on all bank-notes other than those issued under the 
National Banking Act of 1883, and the Federal Reserve 
Act. Although this gives an advantage to the National 
banks, it is offset partly by the greater latitude of lending 
operations allowed the State banks, their smaller reserve 
and capital requirements. The capital may vary from $5,000 
to $50,000 or even larger amounts in great cities, according 
to the State laws. In many States, the amount required is 
determined by the size of the population or the needs of 
business ; while in others there are no definite provisions 
regarding the amount of capital. The most important 
privilege allowed State banks is that of lending on real- 
estate mortgages. To a small degree this is also allowed to 

275 



276 FUNDS AND THEIR USES 

certain National banks; but State banks may do a much 
larger proportion of their business in this field. 

Trust companies. — The second class of institutions men- 
tioned, the trust companies, perform a wide range of finan- 
cial functions. They serve the public as savings banks, 
commercial banks, investments and underwriting houses, 
besides carrying on a trust business properly speaking. 
At the time of their origin this last was presumed to be 
their principal field of activity ; but in not a few instances 
the trust feature is secondary, while deposit and discount 
has become the chief function. It is particularly in the 
northeastern States that this development has occurred. 

The powers of State banks were pretty well defined be- 
fore 1860, but the trust company is really a new kind of 
bank. The growth of trust companies since 1896 has 
been phenomenal. In 1896 there were only 257 of them 
with a capital of $173,500,000 and deposits of $586,500,000 ; 
whereas in 1907 there were 1,485 trust companies with a 
capital of $645,400,000 and deposits of $2,061,600,000. 
Although the growth since then has not been proportion- 
ately as large, it has still been large. 

Commercial banking activities of trust companies. — 
Part of the business of the modern trust company does not 
differ essentially from that of the commercial bank, de- 
scribed in a preceding chapter. For example, in Massa- 
chusetts, during the year 1921, 114 trust companies with 
combined assets of over $1,145,000,000, had apportioned 
their activities as follows : in their commercial departments 
their assets were $146,000,000; in their savings depart- 
ments, $150,000,000, while in their trust company depart- 
ments their assets were only $249,000,000. These figures 
clearly indicate the overlapping of trust company activity 
not only into the field of the commercial bank, but also at 
the savings bank. In fact, the modern trust company has 
such a wide range of activity that it is no longer simply 



THE TRUST COMPANY 277 

engaged in fiduciary duties. Yet it is just in this direction, 
in the caring for trust funds, that this type of organization 
acquires the peculiarities which set it off from other bank- 
ing institutions. In somewhat the same manner as the 
investment bank, to be described in the following chapter, 
the trust companies are intermediaries between the invest- 
ing public, meaning those who have money to invest, and 
various interests engaged in promoting new enterprise. 
Thus in recent years the trust company has begun to play 
a large part in the financing of corporate industry, and 
has shared with the investment banker the burden of 
directing available capital into productive fields of indus- 
trial activity. 

We are therefore interested more in viewing these fea- 
tures which are peculiar to the trust company than in those 
which also are common to commercial and savings bank 
operations. 

The service of the trust company. — Every well-organ- 
ized system of credit involves a great many fiduciary rela- 
tions. It was to supply the need for greater certainty and 
facility to the administration of these that the trust com- 
pany came to be organized. To make the more common 
trust relations concrete, as well as the more common de- 
mands for their administration, let us recall the experience 
of a retired banker. At an advanced age he had withdrawn 
from the cares and responsibilities of management; he in- 
tended to devote the remainder of his life to the comforts 
of home and the care of his own properties and invest- 
ments. He had not been long in retirement, however, when 
an old friend asked to be allowed to insert his name in his 
will as executor. He consented. A few months elapse 
when the probate judge of his district approached him. 
An estate had been in his court for several years; the ad- 
ministrator, a son of the deceased, had not pushed the 
settlement as fast as his position demanded; the other 



278 FUNDS AND THEIR USES 

heirs complained not only of delay and waste, but also that 
the administrator had employed a portion of the assets for 
his own purposes ; on being cited to appear and render an 
account of his trust, he disclaimed misappropriation of 
funds, but averred that his own business required such a 
portion of his time that he could not give proper attention 
to the estate. The judge urged the banker's acceptance of 
appointment as administrator to wind up the estate as rap- 
idly as the interests of all parties would permit. Pres- 
ently another trust is thrust upon him in such a manner 
that he can not refuse it. A neighbor had died, leaving 
an infant daughter. By will he had appointed the banker 
guardian of his child and trustee of his estate for her bene- 
fit. Decedent held interests in a number of industrial con- 
cerns ; these must be sold and settled and the proceeds 
invested in such a way that safe and sure income would 
be realized for the education and support of the child. It 
would be years before his ward would come to such an age 
that she would be competent to form business judgments 
of her own. In the meantime, if he accepted the trust, he 
would be held to account for the proper care of the estate 
as well as care of the child. 

The economies of the trust company. — These trusts all 
called for the exercise of the same kind of conservative 
judgment, which had fitted him so well for the conduct of 
the banking business ; he soon found himself quite as busy 
with his new duties as he had been before his retirement; 
in fact, so fully employed was he in looking after the 
demands of the trusts imposed that his occupation was 
growing irksome. Such demands, however, increased. The 
failure of a large private bank brought a further request 
for his services. The many creditors, as well as the court 
having the estate in charge, urged his acceptance of ap- 
pointment as receiver. They pointed out his special fit- 
ness; his acquaintance with the men and business firms 



THE TRUST COMPANY 279 

involved; his knowledge of the value of properties and 
securities held. An experience such as his seemed indis- 
pensable to an equitable settlement. The parties concerned 
proposed to allow him to employ such clerical service as 
he might wish, if he would but exercise the business judg- 
ment necessary to the proper adjustment of their interests. 
He accepted this trust also, but, in accepting, it became 
necessary for him to open a down-town office where he 
could be in regular attendance during a few hours each day 
and give attention and direction to affairs. Though clerical 
service was competent to manage the details, an expe- 
rienced and capable financier must pass judgment upon all 
matters involving discretion. It is out of just such situa- 
tions as this, such increasing demands for the competent 
management of trusts, that the first trust companies arose. 
Development of trust company business. — The trust 
company is an American financial institution. Recent 
legislation has attempted to define its powers. It is gen- 
erally understood that the administration of trusts can be 
better handled by such banking institutions than by indi- 
viduals. To take care of funds held in trust for persons 
unable or unwilling to invest for themselves is primarily 
the work of the trust company. This involves the right to 
receive money in trust and to pay interest on the same. 
This, in turn, has been construed to mean the keeping of 
demand deposits subject to check. From this to a regular 
deposit and discount business was but a step ; the growth 
of banking powers of trust companies took place by just 
such successive steps, as is well illustrated in Pennsylvania. 
Trust companies in that State were first provided for by an 
Act of 1881, when title insurance companies, with a capital 
of $250,000, were given trust and fidelity insurance powers. 
Here was the original field of trust company activity. In 
1885, New York State gave trust companies powers of safe 
deposit business ; in 1895, the power to receive money and 



280 FUNDS AND THEIR USES 

issue their obligations therefor, and to loan money on real 
and personal security. In 1900, Pennsylvania trust com- 
panies were allowed to receive demand as well as time 
deposits, and to buy or make loans on commercial paper. 

At present the trust company laws of most States define 
the trust company as a bank with power to act as trustee, 
administrator, executor or guardian. With these functions 
defined, the trust company is seen to possess very extensive 
powers, which give it a tremendous range of activity 
Among other functions of trust companies are : life insur- 
ance, payment of annuities, bonding and fidelity insurance, 
insurance of land titles, safe deposits business. But some 
of these are of considerably less importance than formerly, 
and in many instances have been dropped, while the bank- 
ing business has steadily increased. Some of the very impor- 
tant banking houses of Boston, New York, Chicago and 
other financial centers are trust companies. 

The capital requirements for trust companies are usually 
larger than for State banks, and more nearly approach the 
National bank in the same range of activity than do the 
State banks; but they may lend on real estate security 
more extensively than is possible for National banks with 
which they compete. 

The trust companies are mostly city institutions, and 
not numerous in sparsely populated regions. Where large 
aggregates of investment funds seek markets there is the 
field for modern trust company activity. Thus it is that 
trust companies are more common in the East than in the 
South and West. In Massachusetts alone in 1920 there 
were 114 trust companies with total resources of $1,145,- 
454,824. 

Functions of modern trust company. — If we were to 
list all the functions of the trust company we would have 
to include a wide variety of operations. Take for example 
the powers conferred upon trust companies in the State of 



THE TRUST COMPANY 281 

New York; banking, investment, agency, trusteeship, re- 
ceivership, executorship and safe deposit, with their various 
supplementary activities, are all functions of the trust 
company. A trust company, as we have seen, may act as 
an ordinary commercial bank, receiving deposits, lending 
money, accepting drafts, buying and selling exchange, 
promissory notes, issuing letters of credit ; or it may act 
as an investment company, to buy and sell stocks, bonds, 
and mortgages; or it may take on the duties of an agent, 
as, for instance, acting as fiscal representative of a State 
or municipality or corporation; and in this capacity wield 
power of attorney for any person or corporation ; or, again, 
its activities may be those of a fiduciary nature, guardian, 
trustee of an estate or of a minor, or of persons of unsound 
mind and body, or of an insolvent person or corporation, 
or as executive administrator under the will of a deceased 
person ; or it may engage in the work of trustee under 
equipment trusts or as depository to protect securities, 
contracts, agreements, etc. 

The first trust companies organized did not have Jheir 
powers so broadly or distinctly defined, nor did they 
need them. Before the development of modern methods 
of corporate finance, before the growth of the pres- 
ent complex organization of business, only the general trust 
relations were prominent. Insurance companies were the 
first to undertake the administration of trusts in lieu of 
personal trustees. Gradually, however, as trust relations 
became more highly developed and more frequent, the 
business of holding and executing trusts came to be spe- 
cialized. Within the last fifty years trust relations and 
trust companies have been multiplied. In the vast expan- 
sion of corporate methods of business, the trust company 
has offered in the service of business institutions advantages 
for the registration and transfer of stocks and bonds, for 
the holding of trust deeds and mortgage securities for 



282 FUNDS AND THEIR USES 

bondholders, for receiving assignments of property for the 
benefit of prospective corporations, which are in the hands 
of promoters, or are in the process of reorganization, and 
for the execution of voting trusts, besides the many serv- 
ices which they are able to render as funding agencies, fiscal 
and transfer agents for public as well as private corpora- 
tions, in the underwriting and disposition of stocks and 
bonds and the disposition of moneys. 

As investment agents, the trust company acts in a double 
capacity. In the first place, it acts as trustee for its bene- 
ficiaries ; in the second place, it has a large cash capital 
of its own. For illustration of the kind of business which 
would be peculiarly adapted to trust company activity, 
take the lending of funds for development. Mr. Smith, 
let us say, has purchased large areas of forest land in the 
Northwest, with the idea of a quick sale, giving his notes 
for payment, which become due successively in one year, 
two years, and three years. If, for any reason, events 
should develop, political or otherwise, which prevented 
the quick turnover of the land, it might easily happen that 
Mr. Smith would be called upon to borrow funds for pay- 
ment of these notes. Having originally arranged to pay 
by instalments, believing that before these should become 
due he would be able to turn over the property at a profit, 
he finds the market dead, the notes have matured, and he 
cannot renew them. In such a case Mr. Smith would 
go to a large trust company in one of our financial cen- 
ters, such as Chicago or Boston, lay before the president 
or one of the vice-presidents of the company his prob- 
lem, solicit the company's confidence and invite its 
cooperation in carrying through the deal to a successful 
conclusion. This might mean that the trust company, if 
well assured of the integrity of Mr. Smith and of the value 
of the property, would advance to Mr. Smith the remaining 
part of the purchase price, as the instalments became due, 






THE TRUST COMPANY 283 

taking as security for the loan a mortgage on the property. 
Many of the trust companies would be in a position to come 
in contact with large investors and timber land operators, 
who are in the market for new supplies of timber land. 
Thus the vice-president of the trust company, to whom 
our Mr. Smith has brought his problem, having advanced 
the funds to Mr. Smith and taken a mortgage on the lands, 
would be anxious to help Mr. Smith in the sale of the 
property, and would be likely to bring him in touch with 
interests which would ultimately buy it. It is easily seen 
that such business would not be acceptable to the ordinary 
commercial bank. In fact, commercial banks in general 
are very anxious to stay out of real-estate operations, since 
they often involve the tying up of funds for a considerable 
period of time. It is the nature of funds coming into 
the hands of trust companies which allow them to operate 
in these fields, which would prove very dangerous for com- 
mercial banks ; for it is to be remembered that the funds in 
the hands of trust companies are many of them investment 
funds, not of demand deposits, whereas the great bulk 
of money disposable by commercial banks is made up of 
demand deposits, which must be invested in such a way as 
to insure prompt and rapid liquidation. 

It is quite customary now for individuals of wealth to 
provide for the care of their properties through trust com- 
panies for the benefit of heirs. This is done not only to 
avoid possible family quarrels, but also to assure the con- 
servative management of the investments to be made, and 
thereby guarantee, as far as possible, the permanence of 
the property. As has often been observed, it is harder to 
keep money than to make it ; and many persons inheriting 
wealth have neither the training nor the ability, even if 
they had the inclination, properly to manage a large estate. 
Thus the trust company to-day has become a very active 
agency in this field, taking care of vast sums of money and 



284 FUNDS AND THEIR USES 

managing the financial aspects of many interests. The wide 
range of latitude in this fiduciary field has brought the 
modern trust company indirectly to the edge of the domain 
of active business, it sometimes being necessary, in han- 
dling of estates, for trust companies to take a part in the 
management of factories, mills, etc. It is in these direc- 
tions that the peculiar character of trust companies shows 
itself. Commercial banks may, from time to time, in the 
process of liquidating assets which have come into their 
hands, be called temporarily into these fields of action, but 
it is not typical of a commercial banking business, nor is it 
the kind of business which a commercial bank ordinarily 
solicits. Much closer is the similarity between the work of 
the investment banker and these fiduciary activities of the 
trust company. 

BIBLIOGRAPHY 

Clay, Hebick, Trust Companies. (Bankers' Publishing 
Co., New York, 1909.) 

Kirkbridge and Sterrett, The Modem Trust Company, . 
(revised, Macmillan Company, New York, 1913). 

Moulton, H. G., Financial Organization of Society, Chap- 
ter xvii. 

White, Horace, Money and Banking, Chapter xv. 



CHAPTER XIII 

THE INVESTMENT BANKER 

Need of capital in modern enterprises. — The exigencies 
of modern civilization have created innumerable outlets for 
human activities which were entirely unknown in former 
days, and have at the same time called into being many 
agencies designed to develop, distribute or conserve their 
fruits. The development, for instance, of steam, during 
the last hundred years, of electricity during the last fifty, 
and of the motor industry during the last twenty, has 
called for a tremendous expansion of banking power in 
order to finance the erection of plants in the first place, 
and to help in the distribution of the output in the second, 

Difficult role of the investment banker. — Not only has 
an extraordinary expansion of banking power been neces- 
sary to answer the needs of this modern industrial develop- 
ment, but there has also been a special demand for busi- 
ness ability of a peculiar kind. It is likely that no prob- 
lems of business life are so difficult to handle as those of the 
investment banker. He is called upon continually to make 
the ultimate choice in directing capital into active indus- 
trial effort. It is the investment banker who determines 
whether the hundreds of millions of available investment 
funds, accumulating each year from the savings of society, 
shall be put to use in the building of railroads, or the con- 
struction of ships, or the development of mines, or the 
erection of steel mills, or the opening up of new agricultural 
areas, or any other industrial or commercial activity which 
demands the use of capital. Because this work is so diffi- 

285 



286 FUNDS AND THEIR USES 

cult to perform, it is very highly paid, a fact often not 
appreciated. The popular conception of the so-called cap- 
italist who is grotesquely pictured as sitting in his uphol- 
stered swivel chair, smoking a cigar and drawing an income 
of a million dollars a year without putting his hand forth to 
any effort, is the natural result of the average ignorance 
regarding the functions of capital and the duties and re- 
sponsibilities of those who are called upon to direct it. 
Some one, somewhere, in the great industrial organization, 
must say the final "yes" or "no" in the apportionment of 
available funds for human usage. This is a great respon- 
sibility. It is the kind of responsibility that very few indi- 
viduals are capable of shouldering. In this respect, it is not 
an exaggeration to say that there are fewer individuals in 
the world equipped by natural abilities and by training to 
fulfil the functions of a capitalist than of any other human 
activity. It is this work which devolves upon the great 
investment bankers. 

Risk involved in new undertakings. — The lending of 
money for the creation of new industries is frequently 
attended with very material risks, due to all manner of 
unexpected difficulties and delays arising before the output 
becomes actually marketable. The money initially required 
may be raised in whole or in part by those directly back- 
ing the enterprise, or by promoters who endeavor to enlist 
the interest of capitalists willing to venture their money. 
In the last analysis, however, it is generally the banks 
which are called upon, directly or indirectly, to loan the 
moneys necessary until the enterprise is in such shape that 
its securities may be sold to the public. It cannot, of 
course, be maintained that all enterprises follow in their 
development the steps just outlined. Unfortunately, it is 
only too true that many small and hazardous undertakings, 
particularly of the character of mining or oil ventures, are 
dressed up, before they are more than mere names, by 



THE INVESTMENT BANKER 287 

unscrupulous promoters in such convincing words, or in 
such glowing colors of optimism or deception, that hun- 
dreds of millions of dollars are lost each year by the gullible 
investor. It is largely for this reason that several States 
have recently enacted so-called "Blue Sky Laws," which 
were framed for the special purpose of eliminating the 
shady promoter altogether or at least of making the plying 
of his trade a matter of utmost difficulty. 

Dink between business enterprise and the public— The 
larger undertakings are, of course, usually free from any 
such over-statement or* fraudulent intent to deceive; and 
yet they too must pass the rigid investigations of the orig- 
inal lender. The ultimate lender is the public, but between 
the latter and the interests backing the enterprise, or the 
bank advancing the funds to bring it up to the stage of 
fruition, stands the investment banker. He is the link 
between the enterprise and the public; his is largely the 
function of investigating its merits from all possible angles 
in order to safeguard the interests of the investing public. 
This is highly important, for often times these moneys rep- 
resent the savings of the widow or of the man who, after 
a lifetime of work, retires from business to live on his 
income. Trust funds also are frequently involved, and 
carefully as the provisions of the will creating the trust 
may have been drawn with special reference to permissible 
investments, the safety of the estate depends largely upon 
the judgment of the investment banker. 

It must accordingly be apparent that the position of the 
latter is one of grave responsibility, for on the opinion he 
forms as to the probable continuity of success of the enter- 
prise he recommends, depends not only the safety of the 
moneys of others but his own reputation, for it goes with- 
out saying that each and every mistake he makes tends to 
lower him in the estimation of his clients. 

There is, therefore, a dual reason for him to make his 



288 FUNDS AND THEIR USES 

investigations most thorough. Even so, however, it goes 
without saying that his judgment cannot be infallible, if 
only for the single reason that he may err in the opinion 
he forms as to the relative value of any one of several fac- 
tors he must take into account when judging of a proposi- 
tion as a whole, and a single mistake in one item may 
entirely upset his calculations. His honesty of purpose, 
however, must ever be beyond any question or criticism. 
Investigation of new issues. — In order to minimize the 
chance of mistakes, the investment banker, aside from mak- 
ing a close study and analysis of the general conception 
and character of the enterprise under consideration, gen- 
erally engages the services of engineering and appraisal 
experts, has the books inspected by accountants, makes 
careful inquiry concerning the general standing and char- 
acter of the management, and has his lawyers prepare the 
mortgage or pass on the legality of the issue and its pro- 
visions as well as the validity of important contracts. 
Beyond this, the Interstate Commerce Commission, if the 
new issue be that of a railroad bond or stock, or a public 
service corporation, if the issue rest on a public utility 
enterprise, must pass upon the bond or stock before it may 
be legally issued. This, incidentally, explains the phrase 
so generally accompanying new offerings — "when, as and if 
issued and received by us." It might also be added in 
this connection that, in the great majority of cases, new 
issues are offered to the public before the ink is dry on 
the last document which is to be signed, and consequently, 
to protect himself the investment banker makes his offer 
dependent upon all conditions being properly complied 
with. It may be asked why the offering of the new security 
is made before the last detail has been settled. The reason 
here is that the bid the investment banker makes to the 
issuing corporation for the bonds or stock is based upon 
general market conditions, and that being so he rarely 



THE INVESTMENT BANKER 289 

wishes to run the risk of some unforeseen development 
taking place which would affect the chance of his reselling 
at a profit. 

This brief summary gives an idea of the various steps 
through which a new issue passes before it actually reaches 
the hands of the public. Even after its distribution by the 
investment banker, his responsibility does not cease, as he 
frequently demands representation on the Board of the 
issuing company, or requires that regular statements be 
presented in order that he may follow the career of the 
enterprise. This is all the more necessary since it is a poor 
company indeed, which in the course of time does not have 
to expand, and it is therefore highly desirable that on its 
financial direction there be bankers who are thoroughly 
informed as to its position and able to help in financing 
its necessary extensions. Particularly in bad times a com- 
pany may need money which cannot be borrowed from the 
bank or obtained through the sale of securities to the 
public. In such cases the investment banker is often called 
upon to supply some of his own funds in order to finance 
the needs of the enterprise. 

Helping the investor. — Further than this, the up-to-date 
investment banker keeps in touch with the markets of the 
securities he handles, and, if any of these reach a level 
which places them out of line with the general run of 
investments of equal security and advisability, he fre- 
quently advises their sale and the reinvestment of the pro- 
ceeds in other suitable securities which can be purchased 
on better terms. 

Another very important function of the banker is to 
see that his clients keep their investments well diversified. 
Good as a certain type of security may be, it is, never- 
theless, becoming more and more recognized that the sci- 
entific investment of money calls for a distribution over a 
variety of different kinds of investment and even over a 



290 FUNDS AND THEIR USES 

geographical subdivision thereof. A man may have per- 
fect faith in the integrity of- a Government, municipality, 
railroad, or other outlet for his funds, and yet it would be 
absolutely contrary to the elementary principles of scien- 
tific investment if he placed all his funds in one issue. 
Not only is this because certain forms of investment change 
in their relative security, but because laws may be passed 
which seriously affect their market value. Take as a con- 
spicuous example the Liberty 3%s. Certainly so far as 
security goes nothing in the world could be safer or of 
higher grade, and yet these bonds fell from 100.40 to 89.10 
between January 1st, 1920, and July 1st, 1920, a period of 
just six months, whereas during the same time railroad 
bonds which had to withstand the special effects of the 
so-called "outlaw" strike and the great freight congestion, 
had dropped only from 76.05 to 70.03. In other words, 
while bonds of the harassed railroads fell on an average 
approximately 6 points, the Liberty 3%s, the premier se- 
curity of the world, fell about 10 points. 

Another instance of developments which may arise to 
affect investments may be cited, namely, the effect on 
real estate mortgages several years ago of the firmer ap- 
plication of the personal tax laws in New York State. 
Prior to 1905, real estate mortgages were subjected to the 
personal property tax, which in that year amounted to 
approximately 1.49 per cent in New York City. Since 
real estate mortgages in those years rarely returned better 
than 4 per cent, it is evident that a strict enforcement of 
the personal property tax laws would have wiped out more 
than one-third of the interest collected. Assessors up to 
that time had been fairly lenient in the collection of the 
tax, but according as the city needed to raise more and 
more money, the assessors became less and less generous, 
until the point was being reached when it was hard to bor- 
row money on New York City real estate mortgages on 



THE INVESTMENT BANKER 291. 

advantageous terms. Since this directly affected the devel- 
opment of the community, a law was passed in 1905 which 
exempted real estate mortgages from the personal property 
taxes upon the payment of a recording tax of % per cent 
annually. Even this was found onerous, and the law was 
accordingly amended on several subsequent occasions until 
at present (1921) it provides for the payment of a single 
tax of % per cent, which is to be paid at the time of record- 
ing the mortgage. A wide-awake investment agent would 
have kept his clients informed of the various phases through 
which this form of investment was passing and would thus 
have been able to save them considerable money. Again, a 
change in the tariff may easily affect an industry to a point 
where its bonds lose their margin of safety and conse- 
quently their position as desirable investments. In short, 
eternal vigilance is the price of safety, and the investment 
banker, with his hand on the pulse of the times, is in a posi- 
tion where he can be of the greatest service to his clients in 
helping them to make the necessary adjustments when spe- 
cial causes arise to affect the safety or market position of 
their investments. 

The subject of geographical subdivision should also be 
given proper weight. Mr. Carnegie is reported to have said 
once, ' ' Put your eggs in one basket and watch that basket. ' ' 
Mr. Carnegie was too successful a man to have the sound- 
ness of his views questioned. At the same time, his close 
associates with many of the biggest interests of his day 
gave him quite unusual opportunities to sense the condition 
of the eggs in his basket. Such advantages are enjoyed by 
few. Consequently it is better for the average man to act 
on the older version of the saying, "Do not put all your 
eggs in one basket. ' ' 

The investment banker must, in order to give his client 
the best advice, be given a comprehensive idea of the 
requirements of the investor, the amount of his income 



292 FUNDS AND THEIR USES 

and whether the funds to be invested are likely to be re- 
quired at any time or if the money may be invested in 
securities which have a somewhat slower market, but, as 
an offset, yield a higher return. 

It may, therefore, be of interest to consider more in 
detail, and from a practical standpoint, the scope of what 
may be broadly described as the investment security busi- 
ness. The business houses which occupy the field are called 
"bond houses," "bond dealers," or, as above, "investment 
bankers." The particular terms used are immaterial, as 
they have practically the same meaning. 

General characteristics. — The essential functions which 
are common to such concerns are the buying and selling 
of evidences of corporate, municipal or individual debt, 
that is, various forms of long-time credit funds, together 
with the financing necessary to handle them. The 
broad underlying principles of the business are the same 
as in many others which involve successful merchandising 
as their main function. In the dry goods business, for 
instance, we find houses of all grades and conditions from 
the wholesale jobbing concerns to the extensive and highly 
organized distributing establishments which are both whole- 
salers and retailers, and so on down to the little store and 
even to the man who peddles neckties or handkerchiefs on 
the street. In the bond business we find practically the 
same gradations, from the great underwriting concerns 
which are essentially wholesalers down through the large 
distributing houses, to the small dealers and to the still 
smaller dealers or brokers who, like pedlers, practically 
have no offices, but who occasionally own a few bonds. No 
sharp lines can be drawn to show where the business of 
one class absolutely ends and the other begins, for the busi- 
ness of one merges almost imperceptibly into that of the 
others. 

In every successful trading organization of whatever 



THE INVESTMENT BANKER 293 

nature, whether simple or complex, we find three great 
underlying sets of forces in operation, namely, one set 
leading outward from the base of supply, embodied in the 
buying department ; another set moving toward it from 
the base of demand, embodied in the selling department; 
and a third, which meets these with the power to do the 
temporary financing made necessary by the work of the 
first two, and termed the financial department. Ideal con- 
ditions would exist in the bond business or in any other 
trading business in which these three departments or 
primary sets of forces were about evenly balanced from 
the standpoint of efficiency. 

Ideal conditions rarely exist in practice. Some bond 
houses have active buying departments, but lack the means 
necessary to finance their proposed purchases ; or again, 
when they have the means of financing them, they may be 
deficient in trained selling departments to dispose of the 
securities. A bond house is, of course, not a permanent 
investor, but only buys with the idea of selling again at a 
profit. On the other hand, some houses are known as 
being good sellers, but are constantly handicapped by inef- 
ficient buying departments. 

In varying degrees of development these departments 
are found in all bond houses. The little bond dealer who 
carries his office in his hat is buying department, selling 
department and financial department combined. Some of 
the great distributing houses, on the other hand, have com- 
plex organizations which employ a large number of men 
scattered practically over all the country, with offices in 
foreign capitals, and with subdivisions of the three depart- 
ments in many of the more important financial centers. 

The buying department. — The various sources of supply 
for the wares of bond houses are corporations, including 
railroads, public service, water power, irrigation, manu- 
facturing, building and many others ; Government, States, 



294 FUNDS AND THEIR USES 

counties, and municipalities; and individuals, who borrow 
more particularly on the security of real estate. 

The processes of negotiation for the sale of securities to 
the bond dealers differ with the various issues, the two prin- 
cipal methods being at public sale or at private sale. In 
this country, the usual method employed by the Federal 
Government, States, counties, cities, towns and districts is 
by public sale. At such sales a minimum price is frequently 
fixed, and the bonds are sold to the highest bidder. In- 
dividual investors occasionally compete with the bond 
dealer. As a rule, these individuals are not in touch with 
the market and oftentimes pay a higher price for bonds 
than if they had left the market to the bond dealer and 
purchased later from him. Again, it sometimes happens 
that bonds have been illegally issued. The reliable bond 
dealer always has a legal opinion on the issue before pur- 
chasing. The individual investor must get this legal opin- 
ion at considerable cost or take a chance. Foreign govern- 
ments, on the other hand, in floating loans more frequently 
place their securities with the large banking houses for 
distribution. 

Corporations usually sell their issues at private sale, fre- 
quently offering them first to their stockholders. Very 
often certain corporations deal almost entirely with the 
same bankers in financing all of their requirements, ex- 
pecting these bankers, under proper conditions and with 
certain modifications, to provide them with all funds neces- 
sary for the legitimate growth of their business. 

Staples and specialties. — Securities may be classed as 
staples and specialties. The staples are the seasoned 
securities of well-known corporations or municipalities, 
securities which have successfully passed through the 
fire of panic and have not been found wanting. Many 
special securities have successfully passed through panics, 
but unless a bond is well known in the general markets, 



THE INVESTMENT BANKER 295 

it cannot be classed as a staple. There is always more or 
less of a steady demand for these securities, and the ques- 
tion of their sale becomes largely a question of price. In- 
stitutions are the main buyers of the staples, although by 
no means the only ones. The investments of many corpo- 
rate institutions are to a certain extent limited to such 
securities by legislative enactment. 

Buying in large lots. — Whether it buys an entire issue 
at private sale or bids on a large block of securities offered 
at public sale, the buying department of one house often 
joins with the buying departments of other houses in form- 
ing a syndicate or possibly simply an arrangement to buy 
on joint account. When you see that this or that great 
banking organization has bought $50,000,000 or $100,000,- 
000 of bonds, it is not to be understood that it has necessarily 
purchased them all for its own account. The chances are 
that its direct interest in the business is relatively small 
and that associated with it in a syndicate are a number of 
other firms, institutions, or even large investors, each re- 
sponsible for varying amounts of from $10,000, $25,000, 
$50,000, $100,000, $200,000 to $500,000 and so on. No 
banking house, however important or powerful, usually 
cares to assume the entire risk or tie up a large proportion 
of its capital in one security. When syndicates are formed 
the managers charge a commission for their services, which 
depends upon the amount of work, risk, and probable profit 
involved, and ranges from one-quarter of one per cent to 
occasionally two and one-half per cent, or even more, upon 
the original purchase price of the securities. Thus the 
formation of syndicates is frequently in itself a profitable 
business for the managers, although, contrary to the gen- 
eral belief of the public, syndicates do not always prove 
profitable ventures for the participants. 

The financial department. — In addition to using their 
own capital, bond houses are at times large borrowers of 



296 FUNDS AND THEIR USES 

money. It is the duty of the financial department to pro- 
vide the funds needed to handle the bond issue from the 
time that it is presented to the house until it is sold and 
final payment received therefor. The financial department 
thus occupies a position midway between the buying de- 




Fig. 108. — Interior of Private Banking House. 

partment and the selling department, handling and finan- 
cing the securities taken in by the buying department until 
their final disposition by the selling department. 

The selling department; investor classes. — With the 
goods on the counter, as it were, let us take up the dis- 
tribution of them to investors, which is the general work 
of the selling department. Who are the buyers of securi- 
ties in this country? The*y may be roughly classed into 
two divisions — institutions and individuals. 

Institutions include (1) Insurance companies, life, fire, 
marine, casualty, etc., (2) Banking institutions, such as 



THE INVESTMENT BANKER 297 

savings, National, and State banks and trust companies, 
(3) Endowed educational institutions, such, as colleges and 
professional schools, (4) Governments and municipal 
corporations, which frequently purchase their own bonds 
or occasionally other bonds, for certain funds, and (5) 
Miscellaneous corporations, associations, railroads, public 
service companies and others, which also buy at times both 
their own bonds and other securities. 

The individual investors may be roughly divided into 
the large buyers and the small buyers, or the great capi- 
talists and the little capitalists, the people of large wealth 
and the thrifty people of comparatively small means. 

The insurance companies are in the aggregate perhaps 
the largest institutional owners of securities, their hold- 
ings being made up principally of Government, railroad 
and municipal bonds, with some public utility issues. The 
savings banks are a factor in the investment market second 
only to the insurance companies. Broadly speaking, the 
securities which they purchase are usually high grade, 
although the laws of the various States governing the in- 
vestment of the funds of savings banks differ greatly, so 
that securities eligible for the investment of such funds in 
one State may be ineligible in another. National banks, 
as well as State banks and trust companies, absorb in the 
aggregate large amounts of bonds of all general classes. 

The territorial distribution of the buyers of securities 
is also of interest. Most of the large insurance companies 
and the great savings banks and other fiduciary and finan- 
cial institutions are located in the eastern part of the 
United States, so that the largest bond buying sections of 
the country are the New England and Middle Atlantic 
States. The Central and Western States, however, afford 
a considerable and most rapidly growing bond market 
which is capable of much enlargement. 

Selling methods. — After indicating roughly the sources 



298 FUNDS AND THEIR USES 

of demand for bonds, let ns consider the methods employed 
by the dealers to reach the same. The two main divisions 
of these methods are (1) Written salesmanship, conducted 
through the medium of newspaper and magazine advertis- 
ing, circulars, circular letters and personal letters, and 
(2) Oral salesmanship, or the work conducted by direct 
conference with the investor, either in or out of the dealers ' 
offices. Salesmen are therefore sometimes designated as 
(1) Office salesmen and (2) Outside or traveling sales- 
men. Yet there are no sharp lines of division between the 
two classes since outside salesmen must be competent to 
perform certain office duties, especially letter writing. 

In the past fifteen years there has been a great develop- 
ment of advertising by the legitimate investment houses. 
Prior to that time, modern methods of advertising were 
seldom employed by any of them, largely because, through 
a misunderstanding of the principles of advertising, its 
methods were not regarded as sufficiently dignified for the 
investment banking business. With the growth in volume 
there has been a great improvement in the literature issued 
by the bond houses. Much of it is educational in its nature, 
and is designed to point out to the investor with surplus 
funds both the safe as well as the unsafe fields which may 
be competing for his attention. There has also been an 
improvement in the correspondence systems employed by 
many of the houses, both in the circular and in the personal 
letters issued. 

The bond business demands more and more men who, in 
addition to a broad general training, have had a thorough 
special training in financial affairs— who have a technical 
as well as a general education. It requires men who have 
a fair grounding in economics, including money, credit and 
banking ; in general and corporation finance ; in corporate 
organization, and management ; in the principles of busi- 
ness administration and,' above all, men with a working 






THE INVESTMENT BANKER 299 

knowledge of the more important Government, municipal, 
and corporation securities. 

Even a superficial knowledge of the main divisions of 
modern science, both pure and applied, may at times be 
of great use in the bond business. The higher mathematics, 
physics, chemistry, geology, botany and zoology, with their 
broad applications to the various departments of mechani- 
cal, electrical, civil, mining and hydraulic engineering, to 
various manufacturing enterprises and to the principles 
of agriculture, may at times be of practical advantage to 
the bond man in enabling him to comprehend and more in- 
telligently appreciate the relative value of the security 
underlying some of the bonds which he may be asked to 
negotiate. The high-grade bond man of the future must 
possess a sufficiently broad education to enable him to ap- 
preciate in a general way and to his own satisfaction the 
many varied channels which are calling for capital. 

The investment demand. — The tendency of bond mar- 
ket critics has heretofore been to magnify the importance 
of the institutions and minimize the importance of the indi- 
viduals. When it comes to the question of aggregates, it 
is certain that the institutions take second place to the 
individuals. This has been so for many years, but has 
been made more evident through the great educational 
work in investment carried on during the Liberty Loan 
campaigns. Furthermore, we must not lose sight of the 
fact that the funds of a majority of the institutions are in 
the aggregate simply made up of the funds of individuals 
and frequently of individuals of moderate means. With 
this in mind it will be clear that in the final analysis the 
ultimate success or failure of a specific issue of bonds, or 
even the existence of a good or a bad general bond market, 
depends primarily upon the attitude of the individual in- 
vestors. 

France, which for many years has been one of the great 



300 FUNDS AND THEIR USES 

creditor nations of the world, draws its vast supplies of 
capital from its thrifty people. There are no immense 
individual fortunes existing in that country. It is a nation 
of small savers. It is to be further noted that the indi- 
vidual investor in France is usually a direct investor in 
securities rather than an indirect investor through the 
medium of savings banks or other institutions. Securities 
in France must therefore be available in small denomina- 
tions in order to appeal to the little capitalists, and some 
of the French Government bonds have for years been ob- 
tainable in the low denomination of approximately the 
equivalent of forty cents. 

Bonds and the small investor. — The future development 
of the bond business in this country is likely to be among 
the individual investors. Before the first Liberty Loan 
was launched, it is estimated that there were only between 
350,000 to 500,000 individual bond buyers in the United 
States. To the first Liberty Loan there were approxi- 
mately 4,000,000 subscribers; to the second, 9,400,000; to 
the third, 17,000,000, and to the fourth, over 21,000,000. 
If out of this vast army a minimum of 2,000,000 new in- 
vestors are added to the 350,000 to 500,000 "veteran" 
investors existing before the United States entered the 
war, the potential possibilities for the growth of the invest- 
ment business are clearly apparent. As a result of the 
Liberty Loans, more thorough campaigns of education in 
some of the principles of bond investment have been car- 
ried on throughout the land than the investment bankers 
could themselves have accomplished in fifty years. 

BIBLIOGRAPHY 

Meeker, J. E., The Work of the Stock Exchange, Chapters i, 

xvi. (The Ronald Press, New York, 1922.) 
Taussig, Principles, Vol. I, Book I, Chapters v, vi. 



CHAPTER XIV 



THE SAVINGS-BANK 



Every business based on service rendered. — Under a 
system of exchange, based on consent of parties, any kind 
of business may be profitable to the extent, and only to 
the extent, that it renders a service. One who cannot 
offer to others something which will give them greater 
enjoyment or greater business advantage than can be 
had elsewhere at the same price, must either keep the 
thing offered or reduce the price until, in the judgment of 
some member of the community, an advantage is to be 
found in exchange. But one can not sell at a price which 
will yield him no profit and remain long in business. A 
business man must get a return which will pay him for 
his effort, as well as offer some advantage to others who 
deal with him. The formula of gainful business is: Price 
must equal cost, plus a profit. Again, one who offers to sell 
goods at a price which will yield him a profit must com- 
pete with all others in the market. The fact that there are 
buyers is proof that, in the judgment of those buying, a 
service is rendered to them by the one offering goods; the 
fact that one continues to offer goods at a price which 
brings customers — i. e., remaining long in a business — is 
proof that he produces and sells at a price which yields a 
profit. In other words, the business man is able to con- 
tinue the particular business in which he is engaged under 
these circumstances only : that he can both serve the com- 
munity and at the same time serve himself. His profit 
can not be greater than the total service rendered; for 
when he offers goods at a price which leaves no advantage 

301 



302 FUNDS AND THEIR USES 

to buyers, they will refuse to deal with him. The amount 
of his profit on a particular sale will be the difference be- 
tween the cost of the thing sold and the price obtained — 
his profit is the margin of advantage Which he is able to 
retain for himself through the organization, equipment, 
and management of his business. 

Let us take for illustration a primitive agricultural com- 
munity, such as may be found in many parts of Europe. 
In such a community a man with a hoe is able to obtain 
an income from his occupation sufficient to allow him to 
eke out a miserable existence. This is made possible be- 
cause the European farmer has his business so organized 
that, at the price paid (a life pittance), "the man with 
the hoe" is a more profitable laborer than any other at his 
command ; the European farmer therefore employs him. 
In the Mississippi Valley, on the other hand, the man with 
the hoe is useless at any price; here the business of agri- 
culture is so organized that a high-class machinist (a man 
of high-grade intelligence) is the more profitable. "The 
man with the hoe ' ' leaves Italy and goes to Ohio. In doing 
so, however, he finds his old occupation gone ; he must 
either change his implements of toil or he will soon find 
himself in the almshouse. In parts of France and Spain, 
in fact through a large portion of Europe, the machine- 
laborer of the American farm would be quite as helpless. 
There, to find employment on a farm, he must forsake his 
old method of labor and become a man with a hoe. The 
peasant produces little more than enough for his own 
keep ; the Western farm-laborer reaps a harvest of food- 
stuffs large enough to feed a whole regiment of laborers 
who are working in other fields. The American farmer 
has a large surplus of food to exchange for things produced 
by others, while other producers, being free to devote their 
time to their occupations, are as liberally provided with a 
surplus of useful products. An iron-founder builds up a 



THE SAVINGS-BANK 303 

large and profitable business in a community where before 
only a blacksmith shop was found How, it may be asked, 
is this made possible ? There can be but one answer : the 
founder is able to shape his materials better or more 
cheaply than his competitors To do this he must so or- 
ganize, equip, and manage his plant that he can offer better 
services to the community than did the blacksmith. 

Increased profits the result of increased capital. — 
Profits are made by obtaining funds with which to equip 
some business based on service to be rendered. Some busi- 
ness advantage is recognized ; some service may be ren- 
dered for which others will pay ; to perform this service a 
new form of equipment is needed. In obtaining funds for 
this purpose, however, the one who undertakes it must so 
organize his service, furnish himself with such mechanical, 
appliances, and direct his business in a manner to put him 
on a footing superior to competitors. There must be a 
better adaptation of means to end. The means at hand 
are not entirely material and mechanical. He needs the 
assistance and skill of his fellows; his scheme of success 
must be one which will allow him to call in the services of 
others; for this he needs funds. Even the thing:; neces- 
sary to his mechanical equipment can not be obtained to 
advantage except by exchange with those whose business 
it is to furnish them ; this requires funds. In other words, 
one must have capital to work to advantage, or to do busi- 
ness at a profit. The larger the capital the more highly 
developed the industrial organization, the greater are the 
opportunities made possible to him possessed of the intelli- 
gence to avail himself of them. By reason of this fact 
those who organize and develop industries offer to share 
the larger returns with those who have accumulated capital. 

Saving as a means of obtaining capital. — It has been 
before observed that the only way that a laboring man 
has of obtaining capital is by a process known as saving. 



304 FUNDS AND THEIR USES 

For the purpose of his own income the laboring man is a 
business concern. He is governed by the same rules of 
success or failure as a business corporation. Let us take, 
for example, the New England Telephone and Telegraph 
Company. It has equipped itself for serving those who 
have messages to be sent from place to place. In order to 
do this more effectively, it has provided itself with wires, 
poles, buildings, instruments, etc. The earnings of the 
company received during the year 1920 for services per- 
formed were as follows : 

Exchange service (telephone) $301,282,599 

Toll service 141,883,485 

Miscellaneous 6,276,031 

For rents ( real estate ) "I 

Interest on stocks and bonds of other com- > 11,692,610 
panies owned J 

Gross earnings for year $461,134,725 

The expenses incurred in performing this service were 
as follows : 

General expense, including taxes $ 49,550,145 

Operating expense ' 190,923,453 

Maintaining the plant 135,396,151 

Rentals, royalties, interest 37,479,911 

Total expense of year $413,349,660 

Net income for year $47,785,065 

Earnings. — The carpenter finds it necessary to equip 
himself with the tools of his trade. His earnings for the 
years are: 

Work on Jacob Reiss's barn $368.00 

Work on the Emerson house 530.00 

Shingling Patterson store 134.00 

Repairs on First Nat'l Bank bldg 277.00 

Shop work during year 428.50 

Total earnings for years $1,737.50 

Expenses. — As a means of carrying on the service, how- 
ever, the carpenter must pay out a certain amount in ex? 



THE SAVINGS-BANK 305 

penses. He has clothes to buy to protect himself from wind 
and weather ; he has taxes to pay ; he needs shelter, etc. 
His working plant must be maintained — i. e., he must pro- 
vide himself with food and repair tools broken or worn out. 
At the end of the year his expense account closes with the 
following summary: 



Clothing $178.00 

Taxes 4.00 

Board 536.00 

Repairs of tools, etc 55.50 

Room rent 192.00 

Shop rent 200.00 

Incidentals 106.00 



$1271.50 
Net earnings for the year $466.00 

Profits. — The net result of service in the New England 
Telephone and Telegraph Company was $47,785,065. But 
this company had an equipment and accessory property 
that represented a capital of $1,634,249,533. The carpen- 
ter's net earnings were $466. During the year an outhouse 
burned, where he was working, and he had a set of planes 
and some other tools destroyed. It will cost him $100 to 
replace the loss. This must be made good to place him in 
the same position he was in at the beginning of the year. 
The $466 — the net result of his services — are not, there- 
fore, clear profit. His profit and loss account will appear 
as follows : 

Profit and Loss 



Loss by fire $100.00 

Net profit for year 366.00 

$466.00 



Net earnings $466.00 



306 FUNDS AND THEIR USES 

'■ v . 
Savings from labor. — The question now arises, What will 

he do with the $366 profits on the year's business? One of 
bis expenses incurred was $200 for the rent of shop. He 
had paid out this amount for the use of a building as a 
-means of providing- better equipment than he could have 
furnished with his own capital. He also recognizes that 
he could work to higher advantage if he had a steam-engine 
and some lathes. None of these things will be of use, how- 
ever, till he can get all of them together. He decides to 
lay by the $366 and add to the amount the profit of each 
year till he has $2,000 — the sum that it will cost to buy his 
machines. It is this process of laying by the 'surplus' earn- 
ings or net profits for capital use that is called saving. 

The service of the savings-bank. — The service rendered 
by the savings-bank finds illustration in a story told. of a 
journeyman blacksmith. He was a man of more than or- 
dinary ability, but addicted to drink. His employer, be- 
coming interested in the man, thought that he might induce 
him to reform his habits. He pointed out to the journey- 
man that he was a man of talent ; that he could get regular 
employment and good wages ; that he was spending his in- 
come in a way that would add nothing to his comfort ; not 
only was he not improving his mental condition, but he 
was contracting a habit which would finally render him 
morally irresponsible and physically unsound. Continued 
indulgence of appetite would so far unfit him for service 
that no one would care to employ him in his present 
capacity. He would ultimately be reduced to the ranks 
of the incompetent and end his days in poverty. All this 
the dissipated journeyman admitted frankly. "But," said 
he, "what is there for me to live for and work for except 
the present? What encouragement have I to try to get on 
in the world? At one time I entertained some hope for 
better things, but this hope is gone." He recounted that 
after learning his trade he had started out with the best 



THE SAVINGS-BANK 307 

of resolves. When young and strong he had determined 
to devote himself industriously to his trade, to work as a 
journeyman until he had laid up enough to buy a shop of 
his own. He hoped ultimately to become an employer of 
men, to profit from the skill and labor of others, instead of 
having to sell his own labor to those who had the capital 
with which to make the most of it. By industry and thrift 
he had the first year saved $200. This he deposited in a 
commercial bank. The second year added $250 more to his 
account. A few months later, however, after he had saved 
something over $500, the bank failed, and an insolvency 
proceeding of two years left him about $100 in dividends 
from the brankrupt estate. He resolved to trust banks 
no further/ The only service which they could render him 
was to provide a place for the safe-keeping of his savings. 
They had failed in this. The banks had everything to 
gain from his patronage ; he had everything to lose from 
failure. He now' purchased a wallet and in this decided 
to carry his savings until he had accumulated the requisite 
amount. Coin was heavy ; he exchanged all money of this 
kind received for paper money, and small bills were traded 
for large ones ; these he could easily tuck away in his 
wallet. The wallet he kept with him while at his work, 
and for safety guarded his sleeping-room with a strong 
bolt. He finally got together about $600. Again he 
thought the time at hand when he might become the pro- 
prietor of a shop. One night, while asleep, a fire broke 
out in the house where he lived ; the smoke thickened 
around him ; he became stupefied. Neighbors coming to 
the rescue forced the bolts and carried him out in time to 
save his life, but his wallet was left behind. Nearly six 
years of industry and sacrifice had come to naught. In 
despair, he determined to enjoy his earnings as fast as he 
received them. 

Conditions giving rise to the savings-bank. — Here was 



308 FUNDS AND THEIR USES 

a man of skill; a man of industrious habits; a man who 
needed only the encouragement of protection to rise to a 
high plane of industrial efficiency. But the conditions were 
unfavorable to his rise. During the last part of the eigh- 
teenth century and the first part of the nineteenth the 
laborer's lot was a hard one. In Europe, wages were still 
low, and a quarter of a century of almost continuous war- 
fare (the wars of Napoleon) made foodstuffs high. There 
was small opportunity for the man who had no means of 
using his own labor and no means of support other than 
the sale of his skill. England, the most prosperous among 
nations, was overrun with paupers. American conditions 
were somewhat more favorable to the laborer, on account 
of the opportunity offered to get out on new lands and to 
possess himself of resources from which he might earn a 
living, regardless of employment and employers; but even 
here there was little care for the wage-earner as such, the 
man without capital. 

The first savings-banks. — The first savings-banks were 
started as benevolent institutions, purely and simply. 
Prof. Albert S. Bolles summarizes the history of their rise 
in the following admirable manner: "When a great want 
is felt in the world men begin to try to solve the problem 
of how to satisfy the want. This question of dealing with 
simple men and women, of taking care of the humble who 
have no assets, or taking care of the poor who come to want 
by improvidence or by misfortune, appears to have re- 
ceived the studious notice of the economist and the philan- 
thropist at the same time. When Jeremy Bentham and 
Malthus recited the benefits of saving in the interest of 
the great body of the people, as well as those who saved, 
about the opening of the century, an English clergyman 
and a Scotch minister, each in his own parish, set in opera- 
tion a plan for his parishoners to save money which em- 
bodied in substance the fundamental principle of the sav- 



THE SAVINGS-BANK 309 

ings institution. Contemporaneously, a woman, Mrs. Pris- 
cilla Wakefield, established such an organization in Eng- 
land. Similar ideas were also advanced at the same time 
by a London magistrate, Patrick Colquhoun, who wrote 
upon the question of popular indigence and measures for 
its relief as early as 1806. In America, in 1816 and 1817, 
the needs and the claims of the poor awakened attention at 
Boston and New York, and thought was immediately 
directed toward a savings institution, because it was 
deemed most helpful. In December, 1816, a group of men, 
interested in the welfare of the city, started a savings-bank 
in Boston. The bank was called the 'Provident Institu- 
tion for Savings in the Town of Boston.' Its purpose was 
to offer 'safe security and investment for the savings of 
people of small means.' The first savings-bank in the 
State of New York was the direct result of a meeting of 
citizens at the New York Hospital on December 16, 1817, 
to take into consideration the subject of pauperism. A 
committee was appointed to report on- the prevailing cause 
of poverty. The report recites, among other causes, that 
'prodigality is comparative among the poor; it prevails to 
a great extent from inattention to those small but frequent 
savings when labor is plentiful, which may go to meet pri- 
vation in unfavorable seasons. When the constitution of 
this society was drafted, it declared that one prime pur- 
pose of the organization should be 'to hold out inducements 
to those people to economy and savings from the fruits of 
their own industry in seasons of great abundance.' The 
earnestness of the men who were members of this organiza- 
tion is proved in the passage of the Act upon their petition, 
by the Legislature in 1819, for the incorporation of a bank 
for savings. In each of the two years thereafter a savings- 
bank was incorporated in that State. The Philadelphia 
Savings-Bank was incorporated in February, 1819." 
The safe investment of savings. — The service to be ren- 



310 FUNDS AND THEIR USES 

dered by the savings-banks is quite a different one from 
that rendered by the commercial bank. With the wage- 
earner the principal financial service to be rendered is not 
one of providing current funds to him who already has 
capital , it is one of providing a safe investment for the 
small savings, or surplus net earnings, of the wage-earner 
in the form of an interest-bearing credit account of men 
without capital, men who are toiling for others in order 
that they may accumulate capital funds. The first pre- 
reqisite of a savings account is safety ; the second is a 
return of income on the investment compatible with safety. 
A man with a shilling or a pound, a dollar or even twenty 
dollars, can seldom find opportunity to invest such a sum 
to advantage. 

The investments of savings-banks. — But when the shil- 
lings and pounds and dollars saved by the many are ex- 
changed for interest-bearing accounts, the fund brought 
together in the bank and each week or month will be large 
enough to enable its officers to invest them safely at a still 
higher rate. This furnishes a source of income, and im- 
mediately converts the small savings of the laborer into 
an investment capital. The laborer need not wait until he 
gets a large fund together before he can use it. , Moreover, 
he does not feel that his saving is a sacrifice, but that he is 
rendering to himself a service and providing himself with 
the means to higher enjoyment. With safety and earning 
power combined, the inducement to saving is vastly in- 
creased — the industrial community becomes more highly 
capitalized, more efficient, more highly cooperative, and 
farther removed from want. The motive to extraordinary 
efforts and saving is shifted from that. of self-sacrifice to 
one of higher enjoyment. The laborer is encouraged to 
strive to acquire a working capital which will <give him 
either higher industrial efficiency or an investment fund, 
the income from which will yield a larger competence. 



THE SAVINGS-BANK 311 

Illustration of the service of a savings-bank. — The serv- 
ice which it is possible for such an institution to render in 
an ordinary community may be illustrated from the in- 
dustrial organization of a typical town. In the place re- 
ferred to is a flouring mill, a foundry and machine shop, 
two implement factories, a brewery, and a wagon factory. 
These establishments employ about 500 men ; besides these, 
there are -railway shops which give employment to some 
250 more.. Some of these receive large salaries, others are 
common laborers. The 750 employees receive, on the aver- 
age, about $5 per day. Altogether they earn about $3,750 
daily— over- $97,000 per month. Out of this income they 
have to pay living expenses. With each, however, there is 
a possibility of saving something. Some of the better paid 
ones may save as much as $50 per month; others may not 
lay by more than $2 or $3 per month. Let us suppose that 
on the average $10 per month might be saved. This would 
give a gross saving fund of $7,500 per month for deposit 
in savings accounts. But there are also between 500 and 
600 domestic servants in the town that earn on the average 
$8 per week — about $19,200 per month, besides board and 
lodging. Let us say that $6,400 of this amount could be 
made available for investment. This would increase the 
monthly income of a bank to $14,000. While $1 or $5 
could not be- conveniently kept or otherwise judiciously in- 
vested by- the laborer, the bank, with $14,000 in hand at 
the end of each thirty days, could do either. One hundred 
and sixty-eight thousand dollars each year for five years 
only would give an institution $840,000 for investment. 
If each laborer contributed but a mite, the possibility of 
such an enterprise through the long course of years would 
prove attractive to the, best financial managers, and the 
services of such would prove highly beneficial, not only to 
the individual depositors but to the whole industrial com- 
munity. In a large city, contributions of nickels and dimes 



312 FUNDS AND THEIR USES 

from the many, in time produce an enormous fund. The 
Provident Institution for Savings in Boston has accounts 
which amount to over $60,000,000. 

Savings are capital funds. — The commercial bank must 
of necessity keep a large percentage of its capital funds 
available for meeting its demand credits. It is organized 
to serve a commercial constituency by providing current 
funds in this form. As a means of maintaining its demand 
credit, capital contributions of money are essential. The 
savings-bank needs no capital stock. A savings account is 
not a current fund. Savings depositors do not ordinarily 
withdraw their accounts except in emergencies, or for some 
better ultimate use to which the savings may be applied. 
The demands for withdrawal, therefore, are ordinarily 
smaller than new investments of savers. Provision is 
usually made for withdrawals in excess of income, but a 
reserve of money is not at all essential to maintaining the 
credit of the institution if proper steps are taken for its 
protection. The Franklin Savings-Bank of Boston, for 
example, at the time of making its report to the State Com- 
missioner of Banking, October 30, 1920, had accounts to the 
amount of $20,430,476, while it had on hand only $27,523 
in cash and cash items. The Five Cent Savings-Bank of 
the same place and on the same date had $16,251,982 in 
accounts, and only $141,505 in cash items. There are in 
the United States, not counting the savings departments 
of commercial banks and trust companies, nor the Govern- 
ment postal savings-banks, over two thousand savings in- 
stitutions. Of these the most important in respect of the 
volume of saving, are "mutual" — that is, they are institu- 
tions operated by trustees for the exclusive benefit of 
savers. They are not organized to make money for the 
corporation, but to provide safe investments in the form 
of interest-bearing accounts. The officers and employees 
receive stipulated salaries from services rendered, and no 



THE SAVINGS-BANK 313 

dividends are paid except to those who have funds on de- 
posit. Nearly all of the early institutions are of this kind. 
The volume of resources of the savings institutions report- 
ing to the Comptroller of the Currency in 1918 was $6,001,- 
750,030; savings accounts amounted to $5,471,579,948; 
and these banks showed a combined capital, surplus, and 
undivided profits of over $491,000,000. 

How to deal with a savings-bank. — The first function 
of the savings-bank — that of safe investment of small funds 
— may not be performed by building vaults and storing 
away the money as it comes in, and then paying it out again 
when requested. The bank not only could not pay interest 
on accounts, but would suffer a net loss. This is incom- 
patible with the prime object of the savings institution. 
It is only when safety is associated with income-producing 
power that the funds may be preserved safely and un- 
diminished. The second function — that of paying an in- 
come on savings accounts — may be performed only by 
allowing the managers of the bank to use its funds in a 
way to produce revenue for the institution with which to 
pay expenses, repay the amount of the accounts, and add 
thereto an increment of interest or dividends. The suc- 
cess of an institution depends upon keeping its funds in- 
vested. This may be done only by establishing credit rela- 
tions with the depositor on the one hand and with borrowers 
on the other. The credit relation with the depositor is 
established in the following manner : The laborer receives 
his weekly wage and is able to lay by out of the amount 
received, we will say, $1 after paying expenses of living. 
In case he is employed during business hours, his wife may 
take this dollar to the savings bank. On entering the bank 
she may meet a janitor or usher, who, learning her pur- 
pose, will show her a small wall-desk upon which are pen 
and ink and proper blanks to be filled out. By following 
his directions, or those which she may find printed before 



314 FUNDS AND THEIR USES 

her, the "deposit ticket" will be filled out, giving name, 
address, date, and amount to be deposited. (Many of the 
banks make out the deposit tickets themselves on account 
of the difficulties experienced in reading the entries of 
depositors. But the self-executed ticket is considered 
preferable by others on account of the evidence of the 
amount deposited being in the handwriting of the de- 
positor, if dispute arises. This is oftentimes of advantage 
in allaying suspicion of dishonesty on the part of an in- 
stitution dealing with ignorant people.) The ticket with 
the money is passed in at the window labeled "Receiving 
Teller." The depositor is now asked to step to the signa- 
ture-book and write her name, and give such information 
as to residence, age, color of eyes, occupation, domestic re- 
lations, etc., as may be considered necessary to identifica- 
tion. On the signature-book a number is placed opposite 
the name by which the account thereafter is to be known 
in all transactions of the bank. The "receiving teller" 
then makes out a "pass-book" on which this number is 
stamped, enters the amount deposited, and hands it to 
the depositor. Thereafter all moneys deposited are en- 
tered in similar manner. Now, what has the woman in 
exchange for her dollar ? The bank has one dollar more of 
money than it had before. In making the exchange, the 
woman has bought a credit obligation of the bank to pay 
her one dollar. To be paid when ? Not on demand, as in 
the case of deposit in the commercial bank, but after the 
prescribed notice (perhaps ten days) to be given to the 
bank of the intention of the depositor to withdraw. This 
rule is made in order that after notice is given the bank 
may not invest the money paid in by depositors until suffi- 
cient has been held back to pay withdrawals for which 
notice, has been given. After sufficient coin has been re- 
tained for this purpose, however, and for current expenses, 



THE SAVINGS-BANK 315 

the bank has no need for holding a reserve, and the other 
money deposited is free for investment. 

Rules governing investments of the savings-banks. — 
But what kind of investment shall the bank make? Will 
it buy commercial paper, as does the commercial bank? 
It would not be to its advantage to do this. The ' ' deposits ' ' 
sold are not for current use; they are bought by the de- 
positor as an investment — a long-time investment. Nor 
can they be used as current funds on account of the notice 
necessary for withdrawal, unless the bank elects to have it 
so. Since the deposits are not to be used as currency with 
which- to produce or to buy goods, and since the purchase 
of commercial paper would not create new deposits at the 
savings-bank, it would only involve itself in risk and 
trouble by so doing. The managers of the savings-bank do 
not come into immediate business contact with merchants 
and manufacturers, and have little opportunity to know of 
the condition of their affairs. But even if they could keep 
in touch with them, such transactions would be one-sided, 
and the investments in commercial paper would have' to 
be renewed every thirty, sixty, or ninety days as the case 
might be. There are many reasons which argue against 
such a disposition of funds ; there is little in its favor. 

The savings-banks, moreover, are legally restricted in 
their investment operations. For example, study the state- 
ment given below of the Home Savings-Bank of Boston. 

STATEMENT OF THE CONDITION OF THE BANK 

at the Close of Business 

September 30, 1921 

Amount due 67,082 Depositors (average $487.41) $32,696,198.41 

Balance to credit of members, Liberty Loan Clubs. . . 11,595.00 

" " " " " Christmas Club 260,315.50 

" " " " " Vacation Club 14,675.50 

Incomplete Mortgage Loans 7,500.00 

$32,990,284.41 



316 FUNDS AND THEIR USES 

To meet these deposits we have : 

Cash in Vaults and in Banks $739,824.80 

Bonds owned: 

United States Liberty 

Bonds $3,312,973.50 

United States Treasury 

Certificates 700,000.00 

Other Public Funds 796,910.26 

Railroad 3,653,805.95 

Street Railway 463,000.00 

Boston Terminal Co 30,000.00 8,956,689.71 

Bank Stock 190,000.00 

Loans : 

On Mortgages ( 1294) 18,941,500.00 

On Personal Security 6,359,201.27 

To Cities and Towns 815,489.80 

Bankers' Acceptances 359,238.28 

Real Estate by Foreclosure 47,230.78 

Taxes, etc., paid on Mortgaged Properties 21,469.14 

War Savings Certificates 35.69 

Liberty Loan Subscriptions 170.00 $36,430,849.47 

Leaving a Surplus of: 

Guarantv Fund $1,610,000.00 

Undivided Earnings 1,630,798.56 

Discount 199,766.50 $3,440,565.06 

Note — We hold depositors' Liberty Bonds for safekeeping to the 
amount of $1,362,950. 

Government loans, other public funds, railroad bonds, 
mortgages and collateral loans form the bulk of the invest- 
ments. A new item of recent years appearing in such 
statements is that of bankers' acceptances. Since the or- 
ganization of the Federal Reserve system, bankers' ac- 
ceptances arising out of commercial transactions are 
eligible for rediscount at the Federal Reserve banks; and, 
on account of their exceptional security — being obligations 
undertaken by member banks of the system, — they have 
been made legal investments for savings-banks. Under 
normal conditions there should be a ready market for such 
paper. The fact that legal safeguards are thrown about 
the investment activities of savings-banks is really a public 
recognition of the purpose for which such banks are organ- 
ized. Following are the investment requirements for sav- 



THE SAVINGS-BANK 



317 



ings-banks in the States of Massachusetts and New York, 
which have served as models for legislation in other States : 

Legal Investments for Savings Banks 



Massachusetts 

Mortgage Loans 

United States Government 

gations 
State Bonds 
County and City Bonds 
Railroad Bonds 
Bankers' Acceptances 
Street Railway Bonds 
Bank Stock 
Personal Loans 
Real Estate 
Telephone Bonds 



Obli- 



New York 

Bonds and Mortgage Loans 
United States Government Obli- 
gations 
State Bonds 
County and City Bonds 
Railroad Bonds 
Bankers' Acceptances 
Real Estate 
Judgments 



Safety of investment. — Of all things that the savings- 
investment managers must take into account, the element 
of safety is of most importance. The bank wants none but 
safe investments. It also wants long-time instead of short- 
time investments. 

Rate of income. — An investment that combines these 
two qualities, however, is usually one of comparatively 
low rate of income. ~ The amount of capital seeking that 
kind of employment is larger in proportion to the 
amount of "gilt-edge" investments on the market than 
the amount of capital seeking investments in which there 
is a higher element of risk — therefore the lower rate of 
interest. The character of investments made by the con- 
servative savings-bank is shown by published reports of 
these institutions themselves. For the Provident Institu- 
tion of Savings in Boston the general classification of its 

investments is as follows : 

Deposits with other banks and bankers $ 1,301,945 

Time loans upon person security 8,674,409 

Stocks and bonds 29,722,318 

Mortgages 23,492,536 

Bankers' acceptances 769,704 



Total $63,960,912 



318 FUNDS AND THEIR USES 

This accounts for its entire assets, except cash on hand, 
real estate, furniture, and fixtures, which amount to 
$692,925. A typical concern of another character may 
be used for illustration. Its investments appear as follows : 

Deposits with other banks and bankers $210,666 

Time loans upon personal security 619,300 

Investment securities owned, viz. : 

Stocks and bonds $66,700 

Mortgages 1,021,932 

Total $1,918,598 

The mutual and the joint-stock savings-bank. — Let us 

analyze these two reports. The first institution is an old- 
line "mutual" company. The second is a " joint-stock " 
company with a capital stock of $200,000. The first is 
operated by trustees for the benefit of depositors. The 
second is operated by managers who offer a certain per- 
centage on deposits, as a fixed charge on the gross earnings 
of the corporation, the profits going to the stockholders 
in the form of dividends. The policies of the two banks 
with reference to investments is evidently quite different. 
The Provident Institution for Savings in Boston has about 
83 per cent of its funds invested in bonds and mortgages — a 
large proportion being in the form of first-class bonds. 
The bond investments appear as follows : 

SCHEDULE OF SECURITIES OWNED 

Public Funds, Bonds 

Par Value 

U. S. Certs, of Indebt. 4%s $1,250,000 

U. S. Certs, of Indebt. 6s 500,000 

United States 3%s 9,600 

United States 4^s 5,815,750 

U. S. Victory Notes 4%s 1,729,650 

Massachusetts 3V 2 s 108,000 

Massachusetts 4s 465,000 

Boston 4s 850,000 

Lowell 4s 110,000 

New Haven, Ct., 4s 25,000 

Quincv 4s 64,000 



THE SAVINGS-BANK 



319 



Attleborough 4s 
Braintree 4s. . . 
Brookline 
Brookline 
Brookline 
Brookline 
Dalton 4s . 
Foxborough 
Grafton 4s . . . 
Manchester 4s 
Tiverton, R. I. 



3.45%.. 

3y 2 s... • 

3 8-lOs. 
4s 



4s, 



4s, 



Par Value 

$25,000 

14,050 

30,780 

15,000 

10,000 

20,000 

50,500 

5,000 

28,500 

129,000 

2,000 



Public Funds, County and City Notes 

Bristol Co. 414s . 

Norfolk Co. 5.80% 

Newton 5.80% ' 

North Adams 3y 2 s 

North Adams 3.60% 

North Adams 5%s 

North Adams 3.65% 

Brookline 3^s 

Brookline 3 9-16s.. 

Brookline 3%s 

Railroad Bonds 

Albany & Susque. 3%s 

Allegheny Valley 4s 

Atch., Top. & Santa Fe 4s 

Baltimore & Ohio 3^3 

Bangor & Aroostook 5s 

Boston & Albany 4s , 

Boston & Albany 4 1 / £s 

Boston & Albany 5s .... 

Boston & Lowell 4s 

Boston & Lowell 4^8 

Boston & Lowell 5s . 

Boston & Maine 4s 

Boston & Maine 4y 2 s 

Boston & Maine 6s 

Boston & Providence 6s 

Boston R. B. & Lynn 4^s 

C. B. & Q. 4s 

Chic, Mil. & St. Paul 4s 

Chic, Mil. & St. Paul 4^s 

Chic, Mil & St. Paul 5s , 

Chic. & Northwestern 4s 

Chic & Northwestern 5s 

Chic, R. 1. & Pac 4s 

Connecticut River 4s 

Delaware & Hudson Co. 4s 

Fitchburg 4s 

Fitchburg 4 1 /£s 



$40,000 

50,000 

50,000 

92,532 

21,000 

8,000 

33,700 

3,600 

4,000 

4,130 



$50,000 
100,000 
300,000 
300,000 
100,000 
510,000 
100,000 
290,000 
174,000 

50,000 
500,000 
200,000 
150,000 

45,000 
290,000 

15,000 
750,000 
300,000 
550,000 
200,000 
550,000 
450,000 

50,000 
250,000 
500,000 
950,000 
250,000 



320 FUNDS AND THEIR USES 

Par Value 

Illinois Central 3%s $250,000 

Illinois Central 4s 550,000 

Lake Shore & Mich. So. 4s 400,000 

Louisville & Nash. 4s 350,000 

Louisville & Nash. 4y 2 s 190,000 

Maine Central 4%s 350,000 

M. Cent., Jol. & N. Ind. 4s 100,000 

Minn. & Iowa 3%s 100,000 

Minn., St. Paul & S. S. M. 4s , 150,000 

New England 4s 200,000 

N. Y. C. & H. R. 3V 2 s 119,000 

N. Y. C. & H. R. 4s 100,000 

N". Y. & N. E. Term. 4s 300,000 

N. Y., N. H. & H. 3y 2 s 390,000 

N. Y., N. H. & H. 4s , . 450,000 

N. Y., N. H. & H. 6s 86,000 

Norfolk & Western 4s 125,000 

Norfolk & Western 6s 36,000 

Northern Pacific 3s 110,000 

Old Colony 4s 1,000,000 

Pennsylvania 4%s 400,000 

Pennsylvania 5s 100,000 

Portland Terminal Co. 4s 200,000 

St. P., Minn. & Man. 4s 275,000 

Southern Pacific 4s 200,000 

Union Pacific 4s 100,000 

Upper Coos 4%s 107,000 

Vermont & Mass. 3%s 672,000 

Street Railway Bonds 

Boston Elevated 4s $250,000 

Eastern Mass. 4 1 /2 s 500,000 

Holyoke 5s 150,000 

West End 4s 100,000 

Gas, Electric and Water Company Bonds 
Lawrence Gas Co. 7s $100,000 

Bank Stocks 

Shs. 

First Nl. Bk., Boston 360 

Merchants Nl. Bk., Boston 1,000 

Nl. Shawmut Bk., Boston 571 

Nl. Union Bk., Boston 312 

Old Boston Nl. Bk., Boston* 350 

Second Nl. Bk., Boston 348 

Webster & Atlas Nl. Bk., Boston 612 

* In liquidation. 

Railroad bonds of the class listed above are still held to 
be among the strongest investments. It is the business of 



THE SAVINGS-BANK 321 

the managers of such a bank to maintain these investments 
at this high level of security. This can be done only 
through careful scrutiny and constant vigilance. When- 
ever and wherever conditions indicate a softening of credit 
strength, a change in investments is called for ; funds must 
be transferred to other stronger companies. 

Comparisons of methods. — In the case of the stock- 
savings company its mortgage investments were largely 
local and industrial. Fifty-four per cent as against 83 
per cent in bonds and mortgages, and those of an inferior 
type in the general security market ! About 10 per cent 
of its funds were "on deposit'' in other banks, while 30 
per cent were invested in commercial paper — short-time 
loans secured by collateral. The loans of this character 
made by the Boston institution amounted to about 1 per 
cent in the former and 10 per cent in the latter case. 

Relations of the savings-bank to the money system. — 
The deposits that go to the savings-bank are usually in 
the form of minor coins, silver, and what is generally con- 
sidered "change." The collection of such money gives 
the bank a double importance in its relation to the money 
system of the country. It reduces the amount of small 
change that the Government would otherwise be called on 
to furnish to the people. By providing a method for the 
safekeeping of funds, (1) it reduces the amount of money 
that would go into hoard, and thereby reduces the demand 
on the Government; (2) it indirectly sets up a chain of 
redemption through the Treasury. The savings-bank also 
has an important relation with the fiscal side of the 
Treasury. When an issue of bonds is offered for sale, these 
institutions are among the largest purchasers. They there- 
fore facilitate the funding process of the Government. 

Relations of savings-bank to other financial institu- 
tions. — The business relations of the saving institutions to 
the commercial bank are largely represented by its "de- 



322 FUNDS AND THEIR USES 

posits ' ' in those banks and by the purchase of bankers ' ac- 
ceptances. There are times when withdrawals exceed de- 
posits; in periods of panic — times when those having 
securities and other properties must realize on them at 
once in order to meet present credit obligations, when sales 
of securities are made at a sacrifice — many depositors of 
savings may find it to their interest to exchange their sav- 
ings investments for the properties offered for sale; in 
times of depression also, when the laboring constituency 
of the savings institution is out of employment, large with- 
drawals may be necessary to meet living expenses. If, 
upon such occasions, the savings institutions do not have 
a part of their investments in such form that they may 
be readily converted without loss, they may become em- 
barrassed. Their constituency may become frightened and 
begin a "run." Such occasions of emergency and ad- 
versity suggest to the savings manager the desirability of 
keeping a considerable part of the institution's funds "de- 
posited" in one or more commercial banks at a low rate 
of interest. The percentage of funds "deposited" will 
vary with the circumstances of each institution. The com- 
mercial banks are always ready and willing to sell credit 
accounts — that is, to buy cash from the savings-banks with 
their own demand credit, and pay from iy 2 to 2% per 
cent for the time that payment is deferred. It is of ad- 
vantage to the commercial bank to receive deposits from 
the savings-bank, because the money thus deposited 
strengthens its reserve, and enables it to exchange a larger 
amount of bank credit for loans. The low rate of interest 
paid by the commercial bank to savings institutions on 
deposits, however, makes it quite imperative that the sav- 
ings-bank keep only such amount invested in this way as 
business safety requires. 

Postal Savings system. — After forty years of effort a 



THE SAVINGS-BANK 323 

system of postal savings-banks was finally established in 
the United States in 1910. Savings institutions had op- 
posed the plan because of dreaded competition. On the 
other hand, it was contended that a strong system backed 
by the Government would corral those savings which the 
large immigrant population either sent out of the country 
or hoarded, and would, also provide saving facilities in 
those parts of the land where savings-banks and other in- 
stitutions had not developed. The system as now organ- 
ized is highly decentralized, — each of the several thousand 
post- offices acting as a unit in the collection and adminis- 
tration of the funds. The control of the whole system de- 
volves upon a board of trustees, consisting of the Post- 
master-General, the Secretary of the Treasury, and the 
Attorney-General. 

Deposits may be made by individuals in amounts of $1 
or multiples thereof. An account of $2,500 and its ac- 
cumulated interest is the maximum upon which interest 
will be paid. Amounts of less than a dollar may be saved 
with the aid of postal savings stamps. • A flat rate of 2 per 
cent interest is paid. This low rate has prevented any 
competition that might have been expected to develop with 
already existing institutions. The funds received are de- 
posited, 5 per cent in a reserve fund in the*TJnited States 
Treasury, the remainder up to 30 per cent in Governmental 
securities, and the rest in State and National banks. 

In recent years the system has not progressed as its sup- 
porters have hoped. This probably has been due to the 
fact that the small investor has placed his savings in Gov- 
ernment bonds with their comparatively high yields, or in 
the many corporation securities which are purchasable on 
the instalment basis from many investment banking 
houses. Competition among the latter has led to greatly 
increased facilities being offered to the small investor. The 



324 FUNDS AND THEIR USES 

number of depositors in the Postal Savings system on 
June 30, 1920, was 508,508, with deposits aggregating 
$157,276,322. 

BIBLIOGRAPHY 

Carver, T. N , Principles of National Economy, Part II, Chap- 
ters xii, xiii. 

Holdsworth, J. T , Money and Banking, pp. 300-308. 

Moulton, H. C, Financial Organization of Society, Chap- 
ter xviii. 

Phillips, C. A., Readings in Money and Banking, p. 270-289. 
(Macmillan Co., New York, 1920.) 

Westerfield, R. B., Banking Principles and Practice, Vol. II, 
pp. 437-442. 



CHAPTER XV 

THE BUILDING LOAN ASSOCIATION AND SIMILAR 
LENDING INSTITUTIONS 

Little more than a quarter of a century had passed after 
the inauguration of saving' institutions before the principle 
of saving was applied in a different way. The savings 
bank gave to the wage-earner an opportunity safely to 
invest his surplus dimes and dollars until he wished to 
use his capital for industrial purposes or until he could 
employ them to greater advantage in an independent 
way. This gave the best of encouragement to saving 
and to the accumulation of funds for capital use. The 
Building Loan Association was an investing institution 
which advanced to the wage- earner funds for his immedi- 
ate use on the security of his future savings. It has been 
noted that the savings-bank sells interest-bearing book- 
accounts to customers and then invests the funds deposited 
in "gilt-edge" securities of other concerns which bear a 
slightly higher rate of interest than the rate paid to de- 
positors. The Building Loan Association receives a definite 
amount of money each month as a payment on stock held 
by members of the association ; the company then invests 
the amounts received in loans to its members — the members 
having the profits from the loans applied to the balance 
due on stock. For example, an association is formed with 
a thousand members ; each member takes one share, the par 
value of which is $100 ; he pays down $1, and agrees to pay 
$1 per month on the stock till, with the accumulated profits, 
the stock is paid for. This gives to the association an in- 
come from stock payments of $1,000 per month, which may 
be loaned to its members on such terms as may be provided 

325 



326 FUNDS AND THEIR USES 

under its rules, the interest from these loans forming the 
profits of the association. 

The distinguishing features of the Building Loan 
Association. — The distinguishing characteristics of the 
Building Loan Association are the following: (1) Usually 
every borrower from the association is a stockholder — that 
is, the company can not invest in any credit obligations 
or securities other than those of its members ; it is a " close 
corporation" both as to membership and as to dealing. 
(2) The capital of the corporation is not represented by 
the amount of stock outstanding, hut by the amount of 
the combined savings, interest, and premiums paid in by 
its members after deducting expenses. To put it in the 
language of the Ninth Annual Report of the Department 
of Labor: "The stockholder or member pays a stipulated 
minimum sum, say one dollar, when he takes his member- 
ship and buys a share of stock. He then continues to. pay 
a like sum each month until the aggregate of sums paid, 
augmented by the profits, amounts to the maturing value 
of the stock, usually $200, and at this time the stockholder 
is entitled to the full maturing value of the share and sur- 
renders the same. It is seen clearly, then, that the capital 
of a building loan association consists of the continued sav- 
ings of its members, paid to the association upon shares of 
stock, increased by the interest and premiums which the 
association has received from loans made by it from the 
savings of its members thus paid to the association, and 
from all other sources of income. The amount of the capi- 
tal of the association, therefore, increases from month to 
month and from year to year. Shares are usually issued 
in series. When a second series is issued, the issues of 
stock of a prior series cease. Profits are distributed and 
losses apportioned before a new series issue. The term dur- 
ing which a series is open for subscription differs, but it 
usually extends over three or six months, and sometimes 



THE BUILDING LOAN ASSOCIATION 327 

a year. Prior to the maturing of a share it has two values : 
one is called the holding- (or book value), and the other 
is called the withdrawal value. The former is ascertained 
by adding all the dues that have been paid to the profits 
that have accrued — that is to say, the holding value is the 
actual value of a share at any particular time; the with- 
drawal value, on the contrary, is that amount which an 
association is willing to pay to a stockholder who desires 
to sever his connection with the association prior to the 
date at which his share matures. Every association has 
full regulations on all such matters, as well as on matters 
pertaining to expenses, notice of withdrawal, and all the 
methods and processes necessary for safe conduct of the 
business. The purchase of a share binds the stockholder 
to the necessity of keeping up his dues, and this secures 
to him not only all the benefits of a savings-bank, but the 
benefit of constantly accruing compound interest." 

Conditions out of which the institution arose. — The 
character of the institution is especially adapted to real- 
estate loans and to the service of the home-building constit- 
uency in a community where funds for this kind of invest- 
ment are scarce. In fact, it is out of just such a situation 
that the Building Loan Association arose. The first or- 
ganization of the kind about which we have any informa- 
tion was founded January 3, 1831, in Frankford, a suburb 
of Philadelphia. Philadelphia was a fast-growing indus- 
trial center. Frankford was an industrial suburb. As 
compared with other large cities, Philadelphia has little 
interest in public institutions; the center of interest for a 
Philadelphian is his home. It is not strange, therefore, 
that the home-building corporation found its first develop- 
ment there. The laboring population at that time could 
obtain little aid from established institutions ; reliance on 
future savings, as part security for a loan, was not looked 
on with favor. The Oxford Provident Building Associa- 



328 



FUNDS AND THEIR USES 



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330 FUNDS AND THEIR USES 

tion was organized to meet the demand for funds for home 
building among people who relied on wages for income. 
It was not until a decade later that the success of the 
Frankford institution commended the general adoption of 
such a plan to meet the demands of other home-building 
constituencies. Between 1840 and 1850 the Building Loan 
Association took a place among the financial institutions 
of most of the industrial centers. The great growth of 
associations of this kind came later; their numbers gradu- 
ally increased till, in the latter part of the nineteenth cen- 
tury their popularity began to decline. This was largely 
due to the fact that the savings-banks and other financial 
institutions had accumulated such enormous investment 
funds that interest on well-secured loans fell below the 
rate needed to make a special fund of the building loan 
type profitable. The savings-banks, especially, devised 
plans for application of savings to the reduction of prin- 
cipal in such a way that they found a safe plan of invest- 
ment and could offer a low interest rate. But, more re- 
cently, with the steady upward increase in the cost of living 
in the twentieth century, there has come a gradual and 
healthy growth in the number and size of building loan 
associations. 

Plans for making loans. — As stated before, loans are 
usually confined to members. While this is the general 
rule, it finds variance in some of the companies when there 
is no demand from members for loanable funds. From the 
stockholders two classes of security are taken, viz., (1) 
mortgage liens on the property to be, improved, and (2) 
collateral deposits of stock in the association. Usually, 
however, the holders of unencumbered shares may obtain 
temporary loans on security of their stock alone to the 
amount of its withdrawal value. There are about 70 
plans employed for the making of loans among the various 
companies. 



THE BUILDING LOAN ASSOCIATION 331 

Loans at a fixed rate by lot. — A few of these associations 
loan money to the members at a fixed rate without 
premium. These usually give the privilege of obtaining 
loans in order of application or by lot. In most cases the 
loanable funds are put up at auction and sold to the highest 
bidder. 

Sales at auction; advance of interest. — One of the 
favorite plans of auction sale is the following: Interest is 
set at a fixed rate (let us say 12% cents per week on $100). 
A member secures a loan of $1,000. To do this he sub- 
scribes for five shares of $200 each, which entitles him to 
become a bidder for the amount desired. He then enters 
the field of competition at an open meeting of the associa- 
tion, offering to pay a certain number of weeks' interest 
in advance. Let us assume that he gets the money on a 
bid for prepayment of 25 weeks' interest. The borrower 
would then receive $1,000, less $31.25, the amount covered 
by this bid, or a net sum of $968.75. Then for the first 
25 weeks he would be exempt from interest payments, 
after which he would pay the regular interest , con- 
tracted for. 

Award to bidder of highest premium on dues. — By a 
number of plans loans are awarded to stockholders bid- 
ding a premium on the stock instead of competing for loans 
by advance of a definite amount of interest. One of the 
most used of these provides for a premium to be paid in 
the nature of a fixed percentage of dues — the amount bid 
to be added to the regular monthly dues on the stock. In 
this case the borrower receives the full amount of the loan 
and pays an interest rate established by the rules of the 
association. . To illustrate : A person wishes to obtain 
$2,000. He becomes an applicant for ten shares of stock 
which have a maturing value of $200 each. Attending the 
meeting for the auction sale of money to be loaned, he 
makes a bid by which he agrees to pay the regular dues 



332 FUNDS AND THEIR USES 

of $1 per share per month and 10 per cent additional as 
premium. That is, on ten shares he will pay $10 per month 
dues, $1 per month premium, and interest on his loan at 
the rate of 6 per cent per annum (if that is the established 
rate), or $10 per month interest. The $2,000 will cost him 
$21 per month until the stock matures, by application of 
dues and profits, when he may cancel his loan by surrender 
of his stock if he chooses. By another plan the interest 
payments are proportionally reduced with each applica- 
tion of dues to principal. In this case the member fore- 
goes his right to participate in the profits of the associa- 
tion. Again, the interest rate may be reduced periodically. 
The variety of plans for maturing loans is such that chap- 
ters might be written without exhausting all the details. 
The illustration as given will serve as an expose of princi- 
ples. A more complete analysis will be found in the report 
above referred to and in the special treatises on the subject. 1 
Plans for the distribution of profits. — An interesting 
feature of the Building Loan Association is the plan for 
the distribution of profits. It has already been said that 
the dues and profits are added to che maturing or book 
value of shares held by members. That is to say, the 
amount of the earnings of the company after payment of 
expenses is distributed to the credit of the balance due to 
the company on deferred stock payments. The application 
of items of profit, therefore, hastens the time when the 
borrower may surrender his stock in full payment of his 
loan. With a company having only one series of stock — 
i. e., a company which starts upon the so-called ''terminat- 
ing plan" of organization and terminates with the comple- 
tion of the stock payments of its members and the conse- 
quent maturity of its loans — the plan of profit-sharing may 
be a comparatively simple one. Let us suppose that a com- 
pany were organized with 1,000 members, each holding one 



i Ninth Annual Report of the Department of Labor. 






THE BUILDING LOAN ASSOCIATION 



333 



share, the maturing value of which will be $200. If each 
member pays $1 at the time of taking out the stock, and 
then pays dues at the rate of $1 per month till the stock 
matures ; if, also, interest on loans is fixed at 6 per cent per 
annum, payable monthly, then at the time of organization 
the company would have in its treasury $1,000. At the 
end of each month $1,000 more would be added by pay- 
ment of dues. In estimating the book value and time of 
maturity of the stock, however, interest received on loans 
would have to be reckoned with. At the end of the first 
month the amount paid into the treasury would be 
$1,000 + $5 interest on the loan of the month before. This 
$1,005 would be loaned at 6 per cent interest payable 
monthly, as a result of which the treasurer would receive 
$5 + $5.02, or $10.02 in addition to the $1,000 dues. Again, 
this $1,010.02 would be loaned at 6 per cent. At the end of 
three months the return would be $5 + $5.02 + $5.05, or 
$15.07 in addition to the $1,000 payments of members. 
Assuming, therefore, that the borrowers would pay the ex- 
pense of making loans, and that the entire amount received 
were put at interest, the dues and profits for the year 
would be as follows : 



Length of 
Investment 


Amount of 

dues paid in by 

members each 

month 


Amount of 
interest paid 
each month 


Total amount 

paid in each 

month 


Total book! 

value of 

each 

share 


profits 

per 

share 


1st month. 

2d 

3d 

4th 

5th 

6th 

7th 

8th 

9th 
10th 

11th " 
12th a 


$1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 
1,000.00 

$12,000.00 


$5.00.2 
5.02.5 
5.05.0 
5.07.5 
5.10.0 
5.12.6 
5.15.2 
5.17.7 
5.20.3 
5.22.9 
5.25.5 
5.28J 


$1,005.00.0 
1,010.02.5 
1,015.07.5 
1,020.15.0 
1,025.25.0 
1,030.27.5 
1,035.52.8 
1,040.70.5 
1,045.91.8 
1,051.13.7 
1,056.39.2 
1,061.67.3 


$1.00 

2.01 

3.03 

4.05 

5.07 

6.10 

7.14 

8.18 

9.22 

10.28 

11.33 

12.39 


$.005 
.01 
.03 
.05 
.07 
.10 
.14 
.18 
.22 
.28 
.33 
.39 


Total 


$61.67.3 


$12,397.22.9 





334 FUNDS AND THEIR USES 

In this the problem is simply one of computing and com- 
pounding interest on loans made, and dividing the total 
interest received during a definite period by the number of 
shares outstanding, thus giving the rate of profit per share. 
By adding profits to dues paid in, the booh valuation is de- 
termined. The ivithdrawal valuation is fixed by the rules 
of the company. It is usually something below the book 
valuation, and for this another column may be added and 
the office record is complete. With interest and other 
tables at hand, the entries may be made by the secretary 
at the end of each month before the monthly meetings. 

In the two methods of organization that were developed 
later, called the serial plan and the permanent plan, there 
is involved a more complex computation as both plans pro- 
vide for a continual issuance of shares. 1 There are between 
twenty and thirty plans employed by the associations for 
the distribution of profits to serial stockholders. One of 
these plans is the same as that commonly used for the de- 
termination of partnership profits when partners have en- 
tered a business at different times, each series representing 
a partner. To illustrate : Let us suppose that an associa- 
tion whose monthly dues are $1 per share has three series 
in force at the end of the third year, with a fourth series 
just issued; that the number of shares in each series and 
the book valuation per share at the end of the third year 
are as follows: 

(1) Series 1 500 shares, value per share $38.87 

(2) Series 2 600 shares, value per share 25.27 

(3) Series 3 400 shares, value per share 12.32 

(4) Series 4 4,500 shares, value per share 00.00 

Let us suppose that the net profits for the fourth year 
are $3,000. It is evident that a fair distribution of profits 

1 The differences between these two plans are as follows : In the 
serial plan new series are periodically being issued and the prospec- 
tive investor may buy shares outright or pay the first instalment at 



THE BUILDING LOAN ASSOCIATION 335 

must have reference to the value of the shares. To deter- 
mine this, however, the profits of previous years are also 
taken into consideration. The total net profit of the com- 
pany up to this time we will assume to be $5,325. The 
problem is to find the earnings on each share at the end of 
the fourth year. Justice to all parties requires that the 
holdings of members be reduced to some common basis. 
Since each stockholder pays in $1 per month, the first 
dollar paid on Series No. 1 has run for 48 months; the 
second, 47 months ; the third, 46 months, etc., to the last 
dollar, which has run only one month. The average length 
of time that each dollar has run in this series, therefore, is 

48 + l 

, or 24 1 /? months. In Series 2 the first dollar paid 

2 
has run 36 months, while the last has run but one month. 

The average length of time for this series is found to be 

36 + 1 

, or 181/2 months. The average for Series 3, by the 

2 

24+1 

same process, is found to be , or 12% months, while 

2 
12 + 1 

the average for Series 4 is only , or 6y 2 months. The 

2 • 

stockholders of the first series have paid in $500 per month. 

This multiplied by 48 will give the total amount invested 

by them. Members holding stock in the second series pay 

in $600 per month, which amount multiplied by 36 gives 

their capital investment. The third series pays $400 per 

month, and is multiplied by 24. The fourth, paying $500 

per month, is multiplied by 12. All of these shares are 

reduced to a $1 investment level by multiplying the num- 

the time of issuance. If he wishes to invest later, he has either to 
wait until another series is issued or pay up by means of fines the 
previous instalments. In the permanent plan waiting for a new 
series or paying for one previously issued has been eliminated. The 
investor may enter the association at any time, buy as many shares 
as desired and pay for them as slowly or quickly as is convenient. 



336 FUNDS AND THEIR USES 

ber of dollars paid in in each series by the average time 
that the series has run. The result is as follows : 

Series 1 $500 X 48 = $24,000 X 24% = $588,000 

Series 2 600X36= 21,600 X 18% = 399,600 

Series 3 400 X 24 = 9,600 X 12% = 120,000 

Series 4 500X12= 6,000 X 6%= 39,000 

Total investment for one month $1,146,600 

Using the total $1,146,600 as a common denominator, an 
apportionment is made: 

588,000 980 

Series 1, or X$5,325=$2,730.77-r-500=$5.46 per share. 

1,146,600 1,911 

399,600 666 

Series 2, — or X 5,325= 1,855.81-5-600= 3.09 '• " 

1,146,600 1,911 

120,000 200 

Series 3, or X 5,325= 557.30-^-400= 1.39 " " 

1,146,600 1,911 

39,000 65 

Series 4, or X 5,325= 181.12—500= 0.36 " " 

1,146,600 1,911 

Distributing the profits thus determined to the several 
shares their hook values will be : 

Series 1 $48 + $5.46 = $53.46 per share. 

Series 2 36+ 3.09= 39.09 " " 

Series 3 24 + 1.39 = 25.39 " 

Series 4 12 + 0.36 = 12.36 " 

In apportioning the profits by this plan it is necessary to 
allow compensation for stock sales made at different times, 
so that all parties within one series may be on a common 
footing. Other plans of profit-sharing will not be dis- 
cussed here. 

Withdrawal plans. — The theory of a share in a building 
loan association is, "that when the periodical dues paid 



THE BUILDING LOAN ASSOCIATION 337 

thereon, together with the profits earned thereby, amount 
to the ultimate, or, technically, the maturing value of the 
shares, the holders shall be entitled to receive, in cash, such 
value, if the shares have not been pledged for loans ; if 
pledged for loans equal in amount to the maturing value, 
then the loans shall be canceled; if the loans do not equal 
the amount, the maturing value of the pledged shares, then 
the holder shall receive in cash the difference between the 
amount of the loans and the maturing value of the shares. ' ' 
It sometimes happens, however, that a stockholder may 
wish to withdraw before the maturity of the series in which 
he is interested. This makes the adoption of some plan 
necessary to render substantial justice. This is usually de- 
termined by the rules of the company at the time of its 
organization and becomes a part of the investment con- 
tract. One plan, employed by about two hundred associa- 
tions, allows the withdrawing stockholder to receive only 
the dues paid in on his own shares, the profits earned be- 
ing retained for the benefit of those who remain until the 
series is closed or matured. 

By another plan the withdrawing stockholder receives 
dues paid in together with interest on the amount at a 
fixed rate ; this, however, being below the rate earned by 
the stock in his series. 

Again, the full profit earned may be paid on withdrawal, 
subject, however, to such fines, penalties, and dues unpaid 
as may stand on the books, together with a withdrawal fee 
prescribed by the rules of the company. A common prac- 
tice is to allow a definite proportion of the earned profits, 
as, for example, 75 per cent, the remainder reverting to the 
series. This proportionate rate may be conditioned on the 
time that the stock is run, the percentage of discount dimin- 
ishing with the length of time of the investment. 

Provision is usually made in the constitution and by- 
laws of companies for the giving of notice by stockholders 



338 FUNDS AND THEIR USES 

desiring to withdraw. It is also usually provided that 
only a percentage of funds received may be used to pay 
withdrawals. If notices of withdrawal call for more than 
the amount available for this purpose, the applicant must 
wait until there are sufficient funds in the treasury. It 
is this feature that protects the building and loan associa- 
tion from danger of bankruptcy. When all expenses are 
paid by fees and charges made at the time that loans are 
contracted for or stock is issued, the company cannot be- 
come a bankrupt for the reason that no fixed or current 
charges can arise which will shorten the life of the institu- 
tion; there are no current liabilities to meet. Obligations 
are only to members or stockholders. 

A development of the last decade has been the introduc- 
tion of the depositing member, that is one who has no inten- 
tion of borrowing, but chooses the association as a savings 
institution in preference to the savings-bank. The low 
cost of operation (less than 1 per cent of the volume of 
business) has enabled the association often to attract in- 
vestors by a somewhat higher return than is offered by the 
savings-bank. With the advent of the depositing member 
it became necessary to pay dividends, and this is usually 
done semi-anuually. 

The building loan association movement began, as in- 
dicated previously, in the industrial urban centers, and 
therefore it was natural to expect associations to insist 
upon weekly or monthly payments by their members. This 
factor disqualified them for usefulness in behalf of the 
farming population, whose income is mainly dependent 
upon the annual or semi-annual harvesting of crops. In 
recent years many associations have changed their rules 
to allow for the making of farm loans payable in semi- 
annual or annual payments. 

Local associations have grouped themselves together into 
county, city, State, and National associations for the inter- 



THE BUILDING LOAN ASSOCIATION 339 

change of ideas and the furtherance of favorable legisla- 
tion. As a part of the latter, the exemption from taxation 
has been a large factor in favoring the recent growth of 
these worthy institutions. 

Morris Plan banks. — The Morris Plan banks constitute 
a system of over 100 separate banks located in industrial 
centers of thirty-one States, and organized to provide the 
industrial population with credit facilities. These have 
existed in European countries for a long time, but it was 
in 1910 that the first bank of this type was started in Nor- 
folk, Virginia. The customers of these banks formerly had 
to rely upon loans from friends, loan sharks, or pawn- 
brokers, because the commercial banks were not interested 
in the development of this field of banking and the pros- 
pective borrowers had no securities to use as collateral for 
loans. The main reliance in their case is honest and indus- 
trious character as evidenced by the possession of steady 
employment, and the ability to obtain two friends to sign 
a promissory note together with the borrower. 

Loans are made for one year, since shorter time obliga- 
tions are considered unsuited to the needs of this class of 
borrowers. The borrowing must have a useful or pro- 
ductive object, thoroughly explained to the bank. Typical 
purposes of loans are : hospital bills, doctor 's or dentist 's 
bills, purchase of fuel, clothing, furniture, labor-saving 
devices for the house, wiring of houses for electricity, 
liquidation of debts and paying interest on mortgages. For 
every $50 borrowed $1 must be paid back weekly for fifty 
weeks toward the purchase of a Morris Plan Certificate 
which may be turned into cash to meet the loan at its 
maturity. The borrower obtains the face value of the note 
less 6 per cent for one year, and an investigation fee of $1 
for every $50 borrowed, but not exceeding $5 in any case. 
This extra fee is necessary, for the operation of the plan 
involves investigating the representations not only of the 



340 FUNDS AND THEIR USES 

borrower but of two co-makers of his note. As the average 
loan on this plan, as shown by an experience of just ten 
years, is about $150, a Morris Plan banker lending $50,000 
must investigate some 333 borrowers and 666 co-makers, 
and record the result of his 999 investigations. And for 
fifty weeks he must receive and record 333 weekly pay- 
ments averaging $3. 

To encourage thrift, Morris Plan full-paid investment 
certificates, which bear 5 per cent interest and can be 
cashed on 30 days' notice to the bank, may be purchased 
outright or by instalments by investors or bankers desiring 
a productive use of surplus funds. 

The parent company of the Morris Plan banks is the In- 
dustrial Finance Corporation, organized in 1914 by Mr. 
Morris for the purpose of providing "cooperative assist- 
ance, preserving the integrity of the system and improving 
the operation of the plan. " It holds a substantial, though 
not a controlling interest in each of the banks. The larger 
share of the stock of each bank is subscribed by local cap- 
italists. This corporation has developed plans whereby 
customers may meet life insurance premiums by the pur- 
chase of savings certificates by instalments. A successful 
plan for discounting trade acceptances has been operating 
for some time. "An individual makes a purchase at a 
cash department store. The sale is for $300 worth of fur- 
niture and the buyer pays $100 in cash and desires ten 
months in which to pay the balance. The store makes a 
Morris Plan Retail Trade draft upon the purchaser, 
and this is accepted by the latter and endorsed by the 
former and then discounted at the Morris Plan bank. The 
purchaser pays the bank as in the case of a conventional 
Morris Plan loan, that is by instalments. In this way the 
customer has the advantage of paying on a cash basis (at 
the store), and still has a reasonable period in which to 
liquidate his obligation." 



THE BUILDING LOAN ASSOCIATION 341 

The Morris Plan Insurance Society during the first three 
years of its existence furnished over $12,500,000 of insur- 
ance protection to 73,000 Morris Plan patrons. The poli- 
cies protect especially the co-makers of the borrower 's note 
and the latter 's family. The insurance is not limited to 
borrowers. 

The total capitalization of the Morris Plan System is 
over $12,600,000. The resources as of December 31, 1920, 
were about $58,000,000. The total volume of business for 
1920 was about $70,000,000 and the number of borrowers 
was over 300,000. The average losses of all the banks dur- 
ing ten years' operation did not exceed one-tenth of one 
per cent. 

BIBLIOGRAPHY 

Huebner, S. S., The Stock Market, Part II, Chapter xviii. 

(D. Appleton & Co., New York, 1922.) 
Moulton, H. G., Financial Organization of Society, Chapter 

xxviii. 
Ninth Annual Report of the United States Department of Labor. 



CHAPTER XVI 

AGRICULTURAL CREDIT INSTITUTIONS AND 
FARM-MORTGAGE BANKS 

Distinction between agricultural credit and rural 
credit. — It is important to distinguish between the two 
kinds of credit used in agricultural enterprise ; first, what 
may be called agricultural credit, and, second, rural credit. 
The former has reference to the credit operations incident 
to handling products such as grain, cotton, and live stock. 
The latter deals with the lending of funds to farmers en- 
gaged actively in husbandry. Agricultural credit, then, 
would include the advances made by bankers and brokers 
to dealers and factors, or local buyers, who are in the mar- 
ket each year to take the grain crop and cotton crop and 
the live stock and who hold these agricultural commodities 
in elevators or warehouses until such time as the general 
consuming public demands them. These credit operations 
are part of the business of getting the food from the land 
to the consumer, or of getting fiber from the farmer to the 
mill. On the other hand, the lending of money directly to 
men engaged in husbandry, for the purpose of supplying 
them with materials, equipment and supplies used in farm 
operations is distinctly rural credit. 

Agricultural credit operations. — Agricultural credit 
might very properly be discussed in connection with gen- 
eral commercial banking; and is separately treated in this 
chapter largely because the Federal Reserve Act has given 
to it special importance. Let us look into the funding 
operations which are employed in the yearly handling of 
grain, cotton, and live stock. The wheat crop from a 

342 



AGRICULTURAL CREDIT INSTITUTIONS 343 

thousand-acre farm of North Dakota is not sold by the 
farmer directly to the flour mill at Minnesota ; it first passes 
through the hands of merchants and brokers, who perform 
a valuable service. The farmer actually gets his cash for 
his crop of wheat from a local buyer, whose function is to 
take the crop from the land, to store it locally at the rail- 
road, and to move it forward to one of the primary grain 
markets — Chicago, Minneapolis, Kansas City, St. Louis, 
Duluth, Milwaukee, Wichita, and Little Rock, etc. This 
local buyer borrows the funds out of which he pays the 
farmer from a local bank. He does not borrow this money 
by pledging the grain as collateral^ for the simple reason 
that he is keeping the grain moving too rapidly. He bor- 
rows on his own personal credit. In turn, he is paid 
promptly by the grain dealer of the primary markets, pay- 
ment being made to him, either on contract, or by consign- 
ment; if on contract, he and the grain dealer have agreed 
at a certain price, the contract price ; if by consignment, he 
ships the grain with the understanding that he will be paid 
the market price on the day of arrival. Our local buyer 
draws a sight draft on the dealer, attaches the bill of lading 
and takes this draft to his local bank, where he gets imme- 
diate payment, or is paid as soon as the draft has been 
forwarded to the drawee and has been honored. The 
dealer settles for the draft at sight, before the grain arrives. 
This, of course, involves a credit operation, since the dealer 
is obliged to make payment for goods before he has re- 
ceived the goods, and therefore before he can either turn 
them into cash by sale, or can borrow on the pledge of such 
goods. He is enabled to do this by what is known as an 
"order bill of lading," which is a bill of lading made out 
to the shipper by the railroad agent in such manner that 
goods are deliverable only to the order of that shipper. 
Thus our local buyer (who is the shipper) would take the 
bill of lading at the time he shipped the grain, would write 



344 



FUNDS AND THEIR USES 



NEGOTIABLE BILL OF LADING 

Chicago and Wichita Railroad Company 

order bill of lading original 

Shipper's No 

Agent's No 

Received, subject to the classifications and. tariffs in effect on the 
date of issue of this Original Bill of Lading, 

at , 192.. 

from the property 

described below, in apparent good order, market and consigned as 
indicated below, to be carried subject to conditions herein contained. 

The surrender of this Original ORDER Bill of Lading properly 
endorsed shall be required before the delivery of the property. In- 
spection of property covered by this Bill of Lading will not be 
permitted unless provided by law or unless permission is indorsed on 
this Original Bill of Lading or given in writing by the shipper. 

The Rate of Freight from 

to is in Cents per 100 Bbs. 

Consigned to ORDER OF 

(Mail Address — Not for Purposes of Delivery) 

Destination State of County of 

Notify 

At State of County of 

Route Car Initial Car No 



No. 
Pack- 
ages 



Description of 

Articles and 

Special Marks 



Weight 
( subject to 
correction ) 



Class or 
Rate 



Check 
Column 



If charges are 
to be p r e p a i d , 
write or stamp 
here, 
"To be Prepaid." 



Received $ 

to apply in pre- 
payment of the 
charges on the 
property described 
hereon. 



Agent or Cashier. 
Per 

(The signature 
here acknowledges 
only the amount 
prepaid.) 



Charges Ad- 
vanced : 



Per 



Shipper Agent 

Per 



(This Bill of Lading is to be signed by the Shipper and Agent of the 

carrier issuing same.) 






AGRICULTURAL CREDIT INSTITUTIONS 345 

on the bill directions to deliver the goods to the order of 
the dealer in the primary market, to whom the goods were 
being forwarded, and sign his name. This would be an 
"order bill." In the hands of the grain dealer at the 
primary market this order bill is negotiable paper, mean- 
ing that it can be turned into money. He is thus enabled 
to raise funds by negotiating this paper, that is, pledging 
it as security for a loan, or selling it to a broker, and these 
are the funds with which he honors the draft of the local 
buyer who has shipped the grain to him. 

It thus appears that the initial process in financing the 
handling of grain is the pledge or sale of a piece of paper, 
which gives to the holder property right in a specific ship- 
ment of grain. This is characteristic of all of the credit 
operations involved in the handling of agricultural prod- 
ucts — a piece of paper either like this order bill of lading 
or in the form of a warehouse receipt, is pledged as guar- 
antee of payment of a loan ; the bank making the loan has 
the privilege of possessing itself of the grain and selling it 
in case the loan is not met at maturity. 

Warehouse receipts as basis of loan. — The real finan- 
cial operation comes in the handling by dealers and brok- 
ers of huge aggregations of grain shipments, which annu- 
ally, in the fall, tend to concentrate in the primary mar- 
kets, mentioned above. The grain so arriving is purchased 
in the manner described by these dealers, who dispose of 
it temporarily in great grain elevators or storage houses. 
Here the grain is sorted and classified according to regula- 
tions laid down by the Board of Trade ; and for such quan- 
tities as are brought thither, the dealer receives warehouse 
receipts which are negotiable instruments. A sample of 
such a warehouse receipt is given on page 346. This receipt 
gives to the holder the right to demand the goods described 
in the receipt : thus the quantity and quality of the grain 
held is noted on the instrument, and great care is taken in 



346 



FUNDS AND THEIR USES 



inspecting the grain, so that the warehouseman may be 
sure that he is giving the holder of the receipt an accurate 



Elevator Receipt 

MID-WESTERN ELEVATOR COMPANY 
Grain Elevators 

No. 7000 Kind of Grain 

Bushels 

Grade 

Chicago, 111.. , 192.. 

Received in Store from 

Bushels 

of subject 

only to the order hereon of 

and the surrender of this receipt, and payment of charges. 



THIS GRAIN IS STORED SUBJECT 
TO ALL OF THE CONDITIONS PRE- 
SCRIBED IN OUR TARIFFS FILED 
WITH THE INTERSTATE COM- 
MERCE COMMISSION. 



Manager 



description of the grain which is received at his warehouse. 
The holder of the receipt can go at any time to the ware- 
house and demand the grain. This does not mean that the 
five thousand bushels which have been delivered at the 
warehouse are the identical five thousand bushels which 
the holder of the receipt receives; but it does mean that, 
upon relinquishment of the receipt, he receives grain of 
the quality and quantity described in the receipt. These 
warehouse receipts are thus available for use in raising 
funds, since they can be pledged as guarantee for the pay- 
ment of a loan. It is by pledging these warehouse receipts 
along with a promissory note that money is raised for 
moving the crops. 

Financing foreign shipment of grain. — It will readily 
be seen that, reduced to simplest terms, this method of 
financing crop movements is really nothing more than the 
mortgaging of the crop during the time that must elapse 
between its harvesting and its ultimate sale. This would 
be a period extending anywhere from a month to a year, 



AGRICULTURAL CREDIT INSTITUTIONS 347 

but the financial burden during that time is gradually- 
shifted, as the grain moves eastward to the seaboard cities 
and across the ocean to the consuming industrial countries. 
For instance, after the grain merchant in Chicago has pur- 
chased ten thousand bushels of wheat from a local dealer 
in Wisconsin, and has held the same for three months in 
elevators in Chicago* he sells the ten thousand bushels to 
a grain exporter in New York, and the ten thousand bush- 
els are shipped to that seaport, loaded aboard a vessel and 
transported to Liverpool. As soon as this shipment is 
made, the Chicago dealer will draw a draft on the New 
York exporter for the value of the shipment, attach bill of 
lading to same and send it through his bank to New York 
for collection. The New York exporter in turn borrows 
from his bank in New York the funds necessary to honor 
the draft made upon him by the Chicago merchant. He 
may do this in two ways. When the grain arrives in New 
York and is immediately reshipped to Liverpool, the New 
York exporter draws a foreign bill of exchange for the 
amount due on the shipment, attaches bill of lading and 
necessary insurance papers, and through his bank, sells this 
foreign draft in the New York money market. There is 
always a demand for such drafts by those who have remit- 
tances to make abroad. Or, if the grain is not reshipped, 
immediately, but held in storage in a New York elevator, 
the exporter can borrow through an ordinary note on the 
warehouse receipt as collateral. In these ways the grain 
itself, still in the process of transportation and before ulti- 
mate distribution, furnishes the necessary guarantee of 
payment to those who supply the funds for these inter- 
mediary steps between producer and consumer. 

Methods of financing the movement of the cotton crop. — 
Even more important in some respects than the grain crop 
is the cotton crop, since such a large share of this crop goes 
abroad. Here conditions are slightly different from those 



348 FUNDS AND THEIR USES 

existing in the handling of grain. The local purchase of 
cotton is sometimes arranged for before the crop matures 
by agents of large cotton merchant houses in New York or 
by local merchants. The cotton planters themselves get 
the necessary funds for maintaining their plantations 
largely through credits which are extended to them by 
local stores ; these stores supplying most of the materials 
essential for the maintenance of the farms. Very often the 
local buyers of cotton arrange to supply the farmers with 
tools, fertilizer, etc., and to share with them in the crop. 
Sometimes the planter is of sufficient means to finance him- 
self, and in that case he sells his cotton crop outright to 
the best bidder. In any case, the cotton goes from the farm 
to the local gin, where the seeds are extracted and the 
cleaned cotton is weighed and the weight registered on 
tickets. These tickets the farmer takes to a local bank, 
and upon surrender of the tickets receives payment from 
the bank, according to the price agreement previously en- 
tered into with the local cotton buyer. When a number of 
such tickets have accumulated, the bank uses them as a 
basis for a loan from some larger bank. In turn, the large 
cotton dealers of New York and New Orleans purchase 
from the local buyers or buy cotton directly through their 
own agents ; the shipments ultimately come to them and 
are stored in great warehouses. They borrow money on 
warehouse receipts in very much the same manner as that 
described in connection with the grain dealers. Through 
each step in harvesting and marketing of cotton, some 
financial institution steps in to furnish funds; and these 
funds are in the form of loans, which are guaranteed by 
the value of the cotton which is being shipped. Either the 
cotton tickets in the initial stage or the later bills of lading 
and warehouse receipts, furnish the negotiable paper used 
in guaranteeing these loans. The export of cotton abroad 
is handled through established exporting houses, which have 



AGRICULTURAL CREDIT INSTITUTIONS 349 

connections with large importers at Liverpool and other 
places. Upon shipment of a cargo of cotton, the exporter 
draws a foreign bill of exchange against the importer to 
whom the goods are consigned, attaches a bill of lading and 
insurance papers, and sells the foreign draft in the New 
York money market, exactly as in the case of the grain 
exporter. Thus, these transactions, involved in the han- 
dling of our vast volume of agricultural products, are made 
possible through negotiable instruments which furnish the 
basis of loans by commercial banks. 

Cattle loans. — There are also extensive credit operations 
each year in the handling of cattle. Large herds of cattle 
move from the breeding areas of the West eastward each 
year to the feeding grounds of the great corn States — Iowa, 
Kansas, Nebraska, Illinois, etc. After the feeding and fat- 
tening period is over, the cattle are sold to the great meat- 
packing establishments in the centers of that industry, at 
Chicago, St. Louis, Cincinnati, and other cities. The cattle- 
men are financed in these operations through loans by spe- 
cial cattle loan companies, who make a business of lending 
money for this purpose. They maintain a staff of more or 
less expert cattle judges, and assume the risk involved in 
furnishing funds for the purchase of these cattle and for 
their maintenance during the period of growth. As in the 
case of the grain crop and the cotton crop, here also the 
security for the credit extended is the product itself — the 
cattle ; that is, the cattle are pledged to the cattle loan com- 
panies for payment of the loan. These cattle loan com- 
panies, which specialize in the handling of cattle paper, 
are really brokers; they act as intermediaries between the 
cattle-men and the banks which actually lend. The cattle 
loan companies are usually in the centers of the packing 
industry, and are connected with the national banks of 
those centers, which are directed by the large packers. 

Commodity paper. — In all of the cases mentioned above 



350 FUNDS AND THEIR USES 

and in other minor agricultural operations, such as han- 
dling and sale of the fruit crops, these instruments of 
credit are based on actual agricultural produce in transit 
or in storage, and are termed "commodity paper." This 
commodity paper, based on the sale of agricultural prod- 
ucts, receives special consideration at the Federal Reserve 
banks. A bank belonging to the Federal Reserve system 
can rediscount this paper on more favorable terms than 
those granted in the case of ordinary commercial paper. 
The purpose of this special leniency is to facilitate the sup- 
plying of funds to move the crops. Money needed for this 
purpose, in previous years, has imposed a severe strain on 
the entire money market of the country, and especially 
caused a stringency in New York. By making this com- 
modity paper eligible for rediscount at the Federal Re- 
serve banks this stringency has been relieved. 

It is plain from this summary description of agricultural 
credit operations that in principle the loans advanced to 
grain and cotton merchants and dealers are essentially like 
ordinary commercial loans secured by the hypothecation 
of collateral; and the loans to cattle-men are based on a 
modified form of chattel mortgage. 

Nature of rural credit. — Now turning to rural credit, 
among the kinds of long-time paper discussed in Chapter 
VIII, it will be remembered that farm mortgages were 
mentioned. The chief reason why the ordinary commercial 
bank is not interested in buying farmers ' notes secured by 
mortgages on farm property is that such paper matures 
too slowly. As has been indicated, short-time paper is the 
kind desired by commercial banks. The reason for this is 
easily seen if one bears in mind the sort of obligation the 
bank assumes when it gives to a customer a drawing 
account. This drawing account, called a "deposit," is 
a demand obligation of the bank ; it means that the bank 
must be ready at any moment to hand over the 



AGRICULTURAL CREDIT INSTITUTIONS 351 

counter cash to the extent of such obligations. This is the 
nature of bank ''deposits." If the bank fails to honor a 
draft on any of its customers' "deposits" it practically 
admits insolvency. This being the case, a commercial 
banker must have his funds so disposed that the paper he 
holds will be constantly maturing, so that he will have a 
steady stream of cash coming in, and can constantly test 
the worth of the credit of his customers by their prompt 
and frequent payment of notes. The agricultural loan does 
not meet this requirement. It is usually made ,for a year 
or longer, and often with the idea of renewal. Further- 
more, in case of non-payment when due, it is more difficult 
to liquidate, because it is harder to find a purchaser of 
the piece of farm land given as security than it is a stock 
of merchandise; for this reason, the commercial banker is 
not favorably disposed towards farm loans. Some of our 
National banks, in the large agricultural States, do invest 
part of their funds in farm paper ; but loans of this kind 
are more often planting or harvesting expenses, and run 
less than a year. Even then such loans have to be care- 
fully watched, and in good banking opinion should be 
restricted to a small percentage of the total amount placed. 
Farm-mortgage bank. — When a farmer wishes to get 
funds, therefore, he applies to a different sort of institu- 
tion. He must find some one who wants to buy long-time 
paper. He finds this kind of a market in the farm-mort- 
gage bank. There are two classes of farm-mortgage banks ; 
first, the private banking houses, which buy and sell farm 
mortgages or place mortgages for a commission ; second, 
the land banks — the Federal Land Banks and the State 
Land Banks, which are organized specially to furnish 
funds in aid of agricultural enterprise. The volume of 
funds so disposed in farm mortgages is large, amounting 
(in 1916) in the case of the private institutions, to some 
$3,500,000,000, and in the Government system to over 



352 FUNDS AND THEIR USES 

$300,000,000. Farm-mortgage bonds are disposed of to 
savings banks, large commercial banks like the National 
City Bank of New York, insurance companies and private 
investors; these bonds are a form of investment of pe- 
culiarly stable value, as was indicated by the market for 
this type of security during the uncertain years 1914 to 
1920. 

Negotiating farm-mortgage loans. — Rural credit is 
based much less upon confidence in the ability of makers 
and indorsers to pay than is ordinary commercial credit. 
As a result it is customary, in making loans to farmers, to 
secure the loan by a mortgage on the farm land. Imple- 
ments, live stock, permanent improvements, house and 
other buildings also go to make up the security back of a 
farm loan. First-mortgage farm loans are restricted to 
30 to 50 per cent of the value of the property pledged ; the 
percentage varies with the locality, situation and fertility 
of the land. If in a thickly settled region, the land is, 
generally speaking, more salable than in a sparsely popu- 
lated area; consequently, in making a loan, a larger per- 
centage of the farm's value is granted. The farm mort- 
gage has been denned as an investment in the form of a 
loan to an individual farmer or farming company, secured 
by a lien on improved, producing farm land, worth at least 
twice the amount loaned. 

The essential details of negotiating a farm-mortgage are 
first the application for the loan. This is made by the 
prospective borrower on a regular printed form, which asks 
for detailed information pertinent to determining the char- 
acter of the petitioner and his economic position. Next 
comes the report of the examiner sent by the farm-mort- 
gage banking house. This goes into further detail concern- 
ing the character and property of the applicant, corrob- 
orating or not, as the case may be, what the applicant has 



AGRICULTURAL CREDIT INSTITUTIONS 353 



stated in his paper. Then follows the mortgage deed, 
which, as shown in Chapter VIII, is a conditional assign- 
ment of property to the banking concern making the 
loan. The mortgage note accompanies the deed ; this is the 
written acknowledgment of the obligation to pay the loan, 
in the form of a promissory note. An assignment of the 
mortgage goes with the other papers in case the mortgagee 
wishes to sell the mortgage to a third party. A title agree- 
ment, whereby the farm-mortgage bank selling the mort- 
gage, agrees to repurchase the mortgage if it should be 
found to be not a first lien on the property, is the last step 
essential in this process of getting funds from the investor 
to the borrower. 

Volume of farm-mortgage loans. — The following table 
gives the volume of loans on farm lands by life insurance 
companies in the United States in 1914, the last normal 
year for which figures are available. Loans to the extent 

Loans on Farm Values 
by Life Companies (1914) 



Loaned on Farms 
by Life Companies, 1914 




Amount | Per Cent 


New England 

Middle Atlantic 

Central Northern 


$ 104,875.00 

827,171.47 

116,800,717.55 

20,433,173.11 

20,870,348.27 

187,204,378.15 

284,118,815.99 

16,601,908.04 


.014 

.030 

.131 

.935 

1,056 

2.726 

3.338 

.567 


South Atlantic 

Gulf and Mississippi Valley . . 
Southwestern 


Northwestern 


Pacific 


Totals 

Averages 


$647,083,487.58 


1.859 





of $647,083,488, about 1.8 per cent of the total value of 
farm property at that time, were being carried by life 
companies. Estimating the amount loaned on farm lands 
and buildings mortgaged to other companies, banks, indi- 



354 FUNDS AND THEIR USES 

viduals, approximately an amount equal to 12 per cent of 
the total value of farm property, was out in farm loans in 
1914. It is impossible to calculate with precision the per- 
centage of mortgaged real estate, but it is safe to estimate 
that at least 30 per cent of the total farm values of the 
country were pledged in 1914 to the payment of these loans. 
What these values are at present is indicated by the table 
giving value of farm land and buildings. Whatever be 

ESTIMATED VALUE OF FARM LAND AND BUILDINGS 
U. S. CENSUS, 1920 

New England $ 917,468,584 

Middle Atlantic 3,002,137,754 

E. North Central 14,937,641,671 

W. North Central 24,469,495,169 

South Atlantic 5,201,773,472 

E. South Central 3,663,693,363 

W. South Central 6,291,188,072 

Mountain 3,163,187,783 

Pacific 4,669,416,734 



Total $66,316,002,602 

the actual per cent of mortgage incumbrance, it will be 
seen that, when applied to a valuation of $66,000,000,000, 
as of 1920, the business of handling farm mortgages, that 
is, the funding of rural credit, is only next in importance 
to the loans of commercial banks. 

The nature of a real-estate mortgage. — It is important 
to note that when the farmer borrows and gives a mortgage 
he not only "funds" his fixed capital (land, buildings, 
equipment and live stock) but also his personal credit. 
Over a considerable portion of the country the personal 
obligation takes the written form of a promissory note, to 
which is attached the deed of land. The mortgage deed 
becomes void when the loan is paid; otherwise it remains 



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Fig. 110. — Coupons of Farm-Mortgage Bond on Previous Page. 



AGRICULTURAL CREDIT INSTITUTIONS 357 

in force, and the property may be sold to obtain funds to 
liquidate the debt. As now handled by large farm-mort- 
gage banks in the South and Middle-West, these documents 
are much like the ordinary coupon bond ; that is, coupons 
to be detached at specific dates accompany the promissory 
note ; these are cut off and sent in for collection when due. 1 
The farm-mortgage standardized. — The insurance com- 
panies and farm-mortgage banking houses in the United 
States and Canada furnish the institutions through which 
the great bulk of the funding of farm credit is done. Some 
of the trust companies, also, especially in New England, 
invest considerable sums in farm-mortgage paper. These 
institutions are in a position to direct a large volume 
of loanable funds into the channels of rural credit. The 
farm-mortgage becomes "standardized" in passing through 
their hands. This means that the two essential qualities 
of a credit instrument (integrity of the maker or indorser 
and security either in his known tangible assets, or in the 
form of a visible pledge of property) are guaranteed by 
the banking house. A trained corps of experienced men are 
kept in the field by each of these farm-mortgage banking 
houses whose business it is to investigate the application for 
a loan, present a report to the branch office, which in turn 
makes its own appraisal of the value of the properties to be 
hypothecated. In turn, this office reports to the main 
office, which again examines into the available data respect- 
ing the locality of the farm to be mortgaged, and the repu- 
tation of that section regarding payments of previous loans. 
If all is satisfactory, the loan is made directly by the bank- 
ing house. These houses offer to the buying public the 
mortgages they hold, and a purchaser is thus buying a 
standardized security, since the mortgage has first under- 
gone repeated scrutiny, according to recognized rules, 
which these companies have established in long years of 

3 See sample form on pages 355-56. 



358 FUNDS AND THEIR USES 

experience. But further than this, it is often customary 
for such banking houses to advance interest, when due, to 
their customers; and, in case foreclosure becomes neces- 
sary, the bank takes back the defaulted mortgage, and re- 
imburses its customer. The bank then proceeds to collect 
what is due it through foreclosure and sale of the pledged 
property. The investor can thus with more safety form 
judgments both of the ability and of the willingness of the 
borrower to pay ; for, as far as he is concerned, the bank- 
ing house itself, in a sense, is the borrower. Since the 
business of such houses depends upon their capacity to 
distinguish good from bad risks in rural credits, they 
necessarily are urged by their own interests to make good 
the mortgages which they sell. Many houses meet the needs 
of investors for securities of even denominations by issuing 
bonds or participation certificates of $100 and up, which 
pay interest and are secured by farm-mortgages held 
against them. 

The service of farm-mortgage institutions. — So many 
factors enter into the estimate of the value of farm prop- 
erty as a basis of .a loan, that the ordinary individual can- 
not undertake to satisfactorily answer for himself the ques- 
tions which arise. The soil, topography, rainfall, forest 
preservation on the watersheds, temperature, moisture, sun- 
light, winds, prevalence of storms, types of crops and types 
of live stock adapted to the environment, population, 
propinquity to urban centers or the transportation facili- 
ties, condition of the borrower, his reputation as a farmer 
and as a citizen — these and many other questions must be 
answered by men specially trained in dealing with farms 
and farmers. It is possible for one living in the neigh- 
borhood to become acquainted with conditions, knowledge 
of which is necessary to safe investment in mortgages; 
and on the whole much money is lent locally in this way ; 
but the great supply of investment funds from outside 






AGRICULTURAL CREDIT INSTITUTIONS 359 

come from persons who cannot acquaint themselves first 
hand with the specific conditions affecting any particular 
farm. This work is done for them by the insurance com- 
panies and farm-mortgage banks, and\hat is the part these 
institutions play in the funding of farm credit They are 
agents for a large buying public who invest their funds in 
this form of credit paper. 

The Federal Land Banks. — The Federal Land Banks, 
however, are a different sort of agent ; they are under Gov- 
ernment supervision and control, which puts them in a sep- 
arate class from the private farm-mortgage bank. There 
are twelve Federal Land Banks, which were organized by 
the United States Government with a capital at first of 
$9,000,000, but now, of over $25,000,000. The United 
States owns over $6,500,000 of the capital stock of these 
banks. The banks are responsible to the Federal Farm 
Loan Board, a bureau of the Treasury Department. 

The relation between these banks and the investing pub- 
lic on the one hand and the borrowing farmers, on the 
other, is most easily understood by thinking of the banks 
as twelve central investment agencies, through which local 
credit associations sell their rural credit paper. For the 
purposes of the system, the country is divided into twelve 
districts (not to be confused with the twelve districts of 
the Federal Reserve system) ; in each district there is a 
Federal Land Bank, and there are many local associations, 
called National Farm Loan Associations. The individual 
farmer who borrows is always necessarily a member of one 
of these local associations. The whole scheme is modeled 
more or less after the rural credit banks of Continental 
Europe, where such local associations are organized in 
nation-wide rural credit systems. 

In these foreign institutions, however, each member of 
a local association is held responsible for the payment of 
the entire debt of the association; this is called unlimited 



360 FUNDS AND THEIR USES 

liability. It simply means that a creditor could legally 
collect a debt which the association had failed to pay from 
any one of the association members, if the other members 
could not contribute to the payment. This is a form of 
organization where the members are as intimately asso- 
ciated as in a partnership, and, as in a partnership, they 
are jointly and severally liable for the debts of the concern. 

This important feature is lacking in the associations 
under the Federal Land Bank system. In its place, the 
close familiarity of the individual members of the 
local associations is supposed to be a safeguard of the 
security of the loans made. The loans are advanced for 
productive purposes; and the farmers banded together in 
these local credit societies are jealous of the good name 
of their association, and therefore are supposed to watch 
carefully to see that borrowers are properly using the funds 
lent, and are prompt in payments of interest and principal. 
As a matter of fact, some of the associations embrace a 
membership scattered over a whole county or even two or 
three counties. So there is little familiarity between mem- 
bers in these instances. The loans are all made with an 
amortization feature ; that is, with each payment of inter- 
est, there goes also a payment of a small percentage of the 
principal. 

Loans are made only on first mortgages, after investiga- 
tion by an officer of the association. A loan cannot exceed 
50 per cent of the value of the land and 20 per cent of the 
value of permanent improvements as appraised by United 
States appraisers. Not more than $10,000 can be loaned on 
any one mortgage. The mortgage is made in favor of the 
local association extending the accommodation. This asso- 
ciation then guarantees the loan both as to principal and 
interest. This guarantee means that the farmer members 
of the association can be held liable for payment up to 
twice the paid in value of the capital stock which they own 



AGRICULTURAL CREDIT INSTITUTIONS 361 

in the association. Under these conditions the Federal 
Land Bank of the district takes over the mortgage, and 
pays the local association. Thus the local association gets 
the funds to lend to the farmer. The Federal Land Bank 
collects a number of these mortgages and pools them in a 
collateral security, against which are issued Federal Land 
Bank bonds. These bonds are sold to the public, or, that 
failing, to the United States Treasury. In this way the 
Federal Land Bank procures the funds with which it buys 
the separate mortgages from the local associations. 

In order to help the sale of these bonds the Government 
has made them lawful investments for all fiduciary and 
trust funds under the jurisdiction of the United States 
Government. They have also been made eligible in many 
States for investment of all public and private funds and 
for investments of savings banks. These bonds are a 
direct obligation of the Federal Land Banks as a whole, 
each and all being liable for payment of interest and prin- 
cipal. As instrumentalities of the United States Govern- 
ment banking system, these bonds are exempt from Fed- 
eral, State, municipal and local taxation. 

The object of the Federal Land Bank system is plainly 
to arrange easy access to loanable funds to farmers whose 
credit is not of the kind desired by private banking houses 
and insurance companies. What these insufficient debtors 
cannot produce in the form of personal credit is supposedly 
made up for them by the liability assumed by the system. 

Rural credit unions. — Credit unions are very similar in 
nature to the local associations described above in connec- 
tion with the Farm Land Banks. A credit union is, prop- 
erly speaking, an institution for savings. It is a thrift 
club. It has been most successful in small urban communi- 
ties where there are strong racial or religious ties. 

There are two types of credit union. The first, called 
saving loan association, is in purpose a cooperative lending 



362 FUNDS AND THEIR USES 

company. There are, in many parts of the country, savings, 
and loan associations that have extended their zone of activ- 
ity to include rural as well as urban mortgages. Especially 
is this true of Indiana and Ohio. In New York these asso- 
ciations are uniting their resources through the New York 
Land Bank. 

The savings and loan associations of Ohio and Indiana, 
although devoting by far the larger part of their money to 
urban business, still extend a considerable amount of credit 
to farmers. Indeed these institutions have gone far to fur- 
nish the agricultural industry with much needed funds for 
improvements. Twenty million dollars, that is twenty 
per cent of all farm loans in Ohio, are supplied by these 
associations. The system followed is similar to that of the 
German rural banks. Loans can be paid back at any 
time, in full, or by instalments, interest ceasing on any 
part of paid-off principal. The machinery is very simple ; 
loans are entered in a pass book, and as payments are 
made the sums are charged off, and the balance remaining 
at any time indicates the amount still due. Security in 
the form of real-estate mortgage is required. 

Fifteen or more persons, having received approval of 
the State Bank Commissioner, are thereby authorized to 
issue shares, charge premiums on loans and to deal in land. 
These "savings loan associations" follow the usual custom 
of credit unions in making loans, viz., to a member of the 
association, who has subscribed to so much stock of the 
association, a loan is made ; a premium is charged, which 
includes interest on the loan and an instalment towards 
paying for the stock subscribed to ; a mortgage is given the 
association for security. This mortgage is the basis of the 
association 's business. It forms the substantial element out 
of which it derives its ability to attract loanable funds. 

State Land Bank of New York. — Although in point of 
time Massachusetts was the first State to provide legisla- 



AGRICULTURAL CREDIT INSTITUTIONS 363 

tion for credit unions, the law having been passed in 1909, 
New York has gone far towards equipping these institutions 
with means to be of real service. In the first place the 
New York credit unions have the privilege of depositing 
funds with other credit unions. Thus savings from all 
parts of the State become available for agricultural pur- 
poses. Credit unions are strengthened by mutual reliance 
and can bring funds to those points where money is in 
demand. In the next place the Land Bank of New York 
presents to the savings and loan associations a banking 
mechanism, very simple, yet thoroughly effective, both in 
facilitating the concentration of funds and the acquisition 
of outside money. The Land Bank of New York acts as a 
central bank receiving deposits from the member banks. 
This provides means for concentrating funds. Then, 
through the instrumentality of debentures, very much like 
those so successfully floated by the Landschaften of Prus- 
sia, the outside money market is tapped. These debentures 
of the New York Land Bank are secured by first mortgages 
valued at one and two-thirds the amount of the bonds, and 
are the direct obligation of the Land Bank of New York, 
which has the strength of a large number of constituent 
banks behind it. Besides this, the bonds issued are subject 
to amortization payments which shall liquidate the debt in 
not more than forty years. The associations themselves 
make up State Land Bank, by each one subscribing $1,000 
to its stock. This bank has regular banking powers under 
the State laws, and the special power to issue bonds on 
security of mortgages held by member banks up to 75 per 
cent of the value of the same. The management of the 
associations is in the hands of their respective boards of 
directors. 

It will be noticed that there is considerable similarity 
between these credit unions dealing in farm-mortgages and 
the building-loan associations. The share system is com- 



364 FUNDS AND THEIR USES 

mon to both, and the fundamental idea of directing savings 
to some useful purpose is common ; in the case of the build- 
ing-loan associations, to the building of homes, in the case 
of the rural credit institutions, to the raising of crops. The 
credit union proper is of less importance than the savings- 
loan association, which has recently taken its place as the 
most popular form of this variety of credit institution. As 
yet neither of these institutions plays a considerable part 
in funding operations outside of restricted areas. They 
are of interest, however, because of the widespread attempts 
of State legislature to promote their organization as a help 
to the small farmer in funding his modicum of credit. 

BIBLIOGRAPHY 

Phillips, C. A., Readings in Money and Banking, Chapter xxvii. 
Robins, Kingman, Farm-Mortgage Handbook. (Doubleday, 

Page & Co., New York, 1916.) 
Wiprud, A. C, Federal Farm Loan System in Operation. 

(Harper Bros., New York, 1921.) 



CHAPTER XVII 

THE INSURANCE COMPANY 

The meaning of insurance. — In previous chapters the 
nature of contracts of security has been fully discussed. 
Contracts of security for the payment of credit obligations 
are specialized forms of insurance. No better illustration 
of concrete insurance may be found than the forms of per- 
sonal security heretofore discussed as indorsement and 
guarantee. Morgan has taken notes from Gates for the 
payment of $300,000, with interest at 5 per cent per an- 
num. He offers to sell these to Drexel for $305,000 — terms 
satisfactory — provided that Morgan will guarantee their 
payment. The guarantee of Morgan is a contract insuring 
Drexel against loss on account of default in the payment 
of the notes by Gates when due. An insurance policy is a 
contract wherein the insurer takes the risk incident to the 
happening of some event which will involve a loss. 

Credit insurance. — The risk on which a policy is taken 
out may be the non-payment of a credit instrument. A 
concern whose business it is to issue policies on such risks 
is called a Credit Insurance Company. A good example 
of such a concern is the American Credit Indemnity Com- 
pany of New York. During the year 1920 this company 
took risk contracts for which it received premiums to the 
amount of $1,710,778. Its losses paid were only $247,774 — 
i e., 14.5 per cent of the premiums paid. This was a very 
low percentage of loss. Nearer the average would be 35 
per cent; though at times, as in 1919, the loss fell to only 
5.7 per cent of the premiums. A wholesaler has an oppor- 
tunity to sell a bill of goods on ninety days' credit to a 

retail house that is not well known to him. He recognizes 

365 



366 FUNDS AND THEIR USES 

a profit in the transaction, but does not care to take the 
risk of losing the account; he therefore takes out a policy 
from a credit company which is in the nature of an indorse- 
ment of the credit of the retail concern. To obtain such a 
policy the wholesale house will make a statement or an 
exhibit of its books, indicating the average loss sustained 
during the last five years by failure of payment of credit 
accounts. This rate or proportion is taken as a marginal 
allowance or "self -insurance" — i. e., the wholesale house 
will carry its own risk equal to the average for the last five 
years. In consideration for the premium paid, the credit 
insurance company steps in and carries the risk in excess 
of this amount. The company may require that the house 
shall sell to concerns only which have a commercial rating 
specified in the policy ; moreover, it may grade the pre- 
miums according to the ratings of customers. A similar 
form of insurance is that undertaken by companies in 
guaranteeing the accounts of building contractors in house- 
building operations. Instead of putting the retailer or 
contractor to the annoyance and necessity of having some 
friend guarantee his account, the wholesaler or house- 
owner pays to the insurance company a premium as con- 
sideration for the risk undertaken, and then makes this a 
part of the purchase price. For the insurance company 
to have undertaken a single risk would have been as dan- 
gerous as for an individual to have guaranteed the credit. 
Perhaps the loss of $247,774 incurred by the company 
above referred to in the course of its year's business grew 
out of a dozen or more contracts. If separate individuals 
had undertaken and sustained these losses it might have 
endangered their business and brought them to a condition 
of insolvency. The insurance company, however, suffered 
a loss on only a few risks out of the total number taken. 
As shown before, the premiums received from the four 



THE INSURANCE COMPANY 367 

hundred and ninety -nine far exceeded the amount lost on 
the one policy where credit payment was not made. In 
fact, the premiums received by the company during the 
year exceeded the losses by $1,463,004. It is in the mul- 
tiplicity of risks taken and the experience of business men 
as to the proportions of losses to risks taken, that a basis 
for conser vative judgment is found; it is from these fac- 
tors that probability of loss is determined. 

The Security Insurance Company. — A highly special- 
ized form of credit insurance is the Security Insurance 
Company. In this the policy is one of reinsurance of se- 
cured credit. The contracts of security to credits issued 
are entered into to protect purchasers of credit instru- 
ments against loss from non-payment. These credits, to- 
gether with their contracts of security, which are given to 
assure the payment of the credit obligations, are then taken 
to a security insurance company, and, the risk being a 
satisfactory one, a policy is issued whereby the company 
undertakes to indemnify the owners of these secured cred- 
its against any loss uncovered by the contracts of security. 
In other words, the insurance company guarantees that the 
security is sufficient to indemnify the owner of the credit 
contract against loss from non-payment. 

Title insurance. — A holder of secured credit, however, 
may feel entirely safe in the value of the property against 
which his contract of security runs — that is, his judgment 
may be that the property against which he holds a lien 
may be adequate to provide funds with which to pay the 
credit claim held by him in case the debtor should fail to 
meet his obligation when due. The only element of uncer- 
tainty may be one of title. He is not in a position to judge 
whether or not the party executing the mortgage has a 
perfect title to the property against which the lien is given. 
As a means of assuring himself of this he lays the transac- 



368 FUNDS AND THEIR USES 

tion before a title insurance company — a concern whose 
business it is to search titles and to take risks of loss for 
failure of title, and to pay the expense of defending ad- 
verse claims. Upon investigation, a policy is issued and 
the holder of the mortgage is placed in a position of in- 
creased security. Such insurance is more often taken out 
by purchasers of real estate. A company of this kind 
usually maintains a complete set of abstracts of title to the 
real estate In the district where risks are taken by them. 
Being in a superior position to pass judgment on the 
nature of the risk, it may offer a low rate of insurance to 
the customer and at the same time protect itself against 
net loss by the receipts of premiums in excess of the 
amount paid out on policies. To illustrate : The German- 
American Real Estate Title Company of New York sus- 
tained losses of only $25 for the year 1900, while during 
that time it received in premiums $17,668. The title losses 
of this organization from the time of its organization have 
been only $4,778, while the total premiums received by the 
company have amounted to $598,761. The rates of insur- 
ance offered to the public are so low that one taking lien 
security or purchasing property outright can well afford to 
take out a policy which will guarantee him against indi- 
vidual loss; while by apportioning the losses of the few 
individuals among the many insured, the company is en- 
abled to pay expenses of administration, maintain a large 
title plant, and have for itself a remainder in profits 
amounting to something like 7% per cent per annum on 
the capital invested in the business. 

Different forms of risks. — There may be as many dif- 
ferent kinds of insurance as there are forms of risk. The 
Insurance Year-Book for 1921 gives the following list of 
risks assumed by insurance companies included in that 
publication : Personal accident, automobile collision, auto- 



THE INSURANCE COMPANY 369 

mobile liability and property damage, automobile bail 
bonds, bank deposits, bicycle accident, bicycle theft, 
burglary and theft, common carriers' liability, credit, 
dentists' liability, elevator, employers' liability, fidelity, 
fly-wheel, general liability, health, income, investment, key 
registry, landlords' liability, live stock, machine breakage, 
mortgage guarantee, patent title guarantee, physicians' 
liability, plate glass, plumbing and water leakage, public 
liability, railway instalment, registered mail, safe, sprin- 
kler leakage, steam boiler, strike, surety, team, vessel liabil- 
ity, workmen's collective, workmen's compensation. The 
so-called fidelity and casualty insurance companies now 
have expanded operations, and write insurance of many 
different kinds. 

The associated companies known as the Lloyds gave a 
notable illustration of the extent to which risk under- 
takings may be applied. For the coronation of King 
Edward VII many millions of dollars were to be spent in 
decoration and in preparation for popular spectacles, on 
which the financial return depended upon chances of 
weather, the health of the sovereign, and many other for- 
tuitous circumstances. Before undertaking business of 
this kind — before building the temporary stands for spec- 
tators, placing decorations of flowers, and arranging dis- 
plays of perishable goods that depended upon the occur- 
rence of the event at a certain hour and place — business 
conservatism suggested the shifting of the risk to concerns 
whose business it was to undertake hazards and to dis- 
tribute loss to individuals over the profits of the many 
and make them a charge against such profits. Policies on 
this event, it is said, were written to an amount exceeding 
$50,000,000. The variety of risks undertaken and the con- 
tracts made to cover loss may be illustrated in another way. 
In the single line known as life insurance, there are issued 



370 FUNDS AND THEIR USES 

by the several hundred companies in existence something 
over 150 different forms of policies, each of which is a 
slightly different form of undertaking. When we consider 
the various classes of risks around which insurance has 
been organized, and the various forms of undertaking 
within each class, the magnitude and complexity of the 
business can scarcely be comprehended. 

Individual risk and speculation. — Every individual 
insurance policy or contract is a speculation. It is a spec- 
ulation of the most fortuitous kind — a form of risk that a 
conservative business man does not wish singly to under- 
take. In consideration for a premium (a very small por- 
tion of the amount involved in the risk), a company un- 
dertakes to become responsible for loss in event such loss 
occurs. The company is in no better position, perhaps, to 
estimate with business certainty the happening of an event 
which will entail loss than is the individual himself. Each 
individual risk is a speculation to the company in the same 
sense as is a margin deal in a bucket-shop to the margin 
taker. Neither margin giver nor margin taker can tell 
which way the market will go ; neither can comprehend to 
an extent which will enable him to make a conservative 
judgment the facts and forces which affect the market. 
Both of them are certain, however, that there will be fluc- 
tuations in market price. If the price of the stock dealt in 
goes one way, the bucket-shop will get the margin; if the 
fluctuation is in the other direction the transaction yields 
a return to the customer. If it were possible to mark out 
the course of the market for the future; if any individual 
could procure the data of business and could so well un- 
derstand it as to allow him to make a conservative estimate, 
then for him a purchase would not be a speculation. It is 
here proposed to show by what method the uncertainty of 
individual risk is reduced to a collective certainty — in other 



THE INSURANCE COMPANY 371 

words, how the speculation of business life is largely re- 
duced by the application of the principle of collective 
insurance. 

Safety of insurance. — Each individual risk is based on 
highly speculative uncertainty. For this no data may be 
procured by which a conservative judgment may be made. 
Business experience, however, has shown that among risks 
of a certain class the percentage of loss is a fairly constant 
one. For example, no one can tell what hour a particular 
building will be consumed by fire ; lightning may strike it ; 
spontaneous combustion may take place in some part where 
shavings have been left by the carpenters and water has 
entered, causing fermentation and chemical decomposition ; 
a mouse may have taken a match to its nest and striking 
it with his teeth may ignite the structure ; a lamp may be 
exploded; an electric wire may emit a spark; a hundred 
possibilities are present, any one of which may result in 
fire entailing total loss. While this is true of each and 
every building in a city, it has been found by experience to 
be quite as true that among all buildings of a certain class, 
constructed of similar material, existing under similar con- 
ditions, the percentage of fires that occur within a given 
time — let us say a year — may be relied on. Among build- 
ings of one class, one out of a thousand will burn down 
each year. This experience gives to the business man the 
basis for a conservative estimate — an estimate on which he 
can make a calculation of aggregate loss that serves as a 
foundation for one of the most conservative of financial 
institutions, the insurance company. With each class of 
insurance the problem for the manager or organizer of 
the company is one of so adapting its capital and its in- 
come as to be able to meet such losses as occur on the risks 
that his company has undertaken. With each class of 
business this adjustment must be a different one, and must 



372 FUNDS AND THEIR USES 

be based on experience that lends itself to a calculation 
that amounts to a business certainty. But, having made 
such an arrangement, he may offer to those members of the 
community who may suffer from individual loss a perfect 
security based on the collection of sharing results. If the 
manager of the company fail in such adaptation, or pro- 
vision made for payment, then he is holding out an induce- 
ment that may lead his customer into a snare. 

The principle of life insurance. — There is nothing more 
uncertain than the continuance of life in an individual, yet 
this uncertainty and the risk attending life have been 
reduced to a problem of business certainty in the organiza- 
tion of the life-insurance company. In 1654 Pascal and 
Fermat evolved the mathematical doctrine of probability, 
and in 1671 De Witt applied this to the probabilities of 
human life. It remained, however, for later years to estab- 
lish from well-kept records and classified statistics the ratio 
of death incident to those living under definite conditions 
■ — a ratio which would serve as a premise for the applica- 
tion of the theory of mathematical probability to life in- 
surance. The result is what is known as the mortality 
tables. These are the mathematical conclusions, based on 
experience, as to probability of death among various classes 
of men. While the life of an individual man, therefore, is 
uncertain, yet it may be counted upon as a certainty that 
15 deaths will occur among a thousand men twenty-one 
years of age who, at the time risks are taken, are termed 
1 'healthy lives." Assuming that a company were to issue 
one thousand policies on a class of lives on which, as a 
business certainty, 16 policies would have to be paid the 
second year, 17 the third, and so forth, the number of 
deaths would increase each year until the remainder had 
been reduced by the deaths of something like twenty years, 
when the annual mortality would decrease. Finally, the 






THE INSURANCE COMPANY 373 

probability is that between the ages of 90 and 100 years 
the last of the one thousand would be dead. 

The "natural premium" and the "level premium" 
plans. — To apply these results in such a way as to cause 
those who live to share the losses on those who die is the 
problem of life insurance. For this purpose two methods 
are generally employed. The first is that known as the 
"natural premium" or assessment method, which implies 
that upon the death of each member of a society or group 
of insured, those who still remain in the society or group 
will contribute a pro rata in order to pay the death losses 
on those who have died. If each of one thousand takes 
out a policy for $1,000, if these are young lives, and if 
during the first year only three out of the thousand die, 
then an assessment of $3.01 on the 997 remaining will be 
sufficient to pay the death claims. Leaving out of consid- 
eration expense of administration, etc., the purely assess- 
ment plan is an application of the principle of pro-ration 
of loss among survivors. The success of such a plan de- 
pends therefore upon keeping within the group or society 
employing the plan an increasing number of members, in 
order that as the policy-holders attain greater maturity of 
years and by death drop out, the assessment may not rise 
to a prohibitive rate ; for, if the society does not increase, 
with each death the number of survivors will proportion- 
ately decrease, and the rate of assessment would necessarily 
rise to meet future losses until the last survivor will be re- 
quired to pay an assessment of $1,000 to the one next 
before him, and he himself would be left without protection. 

Assessment insurance. — Many examples of the working 
of this principle are found within what are known as 
fraternal and assessment insurance orders that provide no 
reserves for the payment of death claims. The Loyal Mys- 
tic Legion of America is an association organized in 1892. 
The record of death-rates, together with the amount of in- 



374 



FUNDS AND THEIR USES 



surance in force, in the early years of its history, is shown 
in the following table: 



Year 


Amount of Insurance in Force 


Death-Rate Per i^ooo 


1897 


$5,419,000 
5,903,000 
6,350,000 
7,753,000 
8,560,500 


2.4 




3.9 


1899 


3.9 




4.2 






6.0 



Let us compare with this a society that was organized in 
1879, which, as to insurance in force, rose to a high rank 
(had outstanding something like $130,000,000 in risks), 
but which in later years lost in numbers, and the average 
age of whose members likewise largely increased. An ex- 
hibit covering the same period shows the following result: 



Year 


Amount of Insurance in Force 


Death-Rate Per 1,000 


1897 

1898 

1899 

1900 


$51,612,500 
44,023,500 
37,294,500 
17,073,500 
10,736,500 


26.9 
30.2 
32.0 

40.8 


1901 


43.3 



These two societies may serve to illustrate the extremes 
in the working of a principle that is as certain as death 
itself. As stated before, the success of such an organization 
depends upon the numerical increase of its membership 
and the maintenance of a low pro rata of old lives. When, 
however, there is an ageing of members or a decrease in 
numbers and a consequent rise in the rate of assessment, 
the result is to drive out the young and healthy lives and 
leave to the order only those whose age or decrepitude 
makes it to their interest to remain and renders them unac- 
ceptable to other companies. 

The reserve companies. — The second principle around 
which the business of insurance is organized is that known 



THE INSURANCE COMPANY 375 

as the "level premium" plan. The assessment practise is 
based on what is known as the "natural premium" — that 
is, the sum required for actual death losses incurred from 
year to year. These, as before noticed, increase as the in- 
sured grow older. The level premium plan provides for 
the collection of more than is requisite for the payment 
of losses in the earlier years of the policy and the accu- 
mulation of a reserve made up of this excess, which, with 
interest, will be large enough to make up the deficiency of 
later years. This fund, or reserve, is invested, and the 
income from the investment is set apart in dividends to 
increase the total amount, so that with this interest and 
dividends the reserve shall equal the face value of the pol- 
icy at the age of ninety-nine years, this being considered 
the date of termination of all policies. No better expose 
of the working of this principle may be found than that of 
Mr. J. W. Hamer before the Wharton School of Finance 
of the University of Pennsylvania : 

"As the reserve upon a policy increases, the amount of 
risk upon that policy decreases — the loss incurred at death 
being merely the difference between the accumulated re- 
serve and the face of the policy. 

"Perhaps a few figures will afford the best explanation. 

"The ordinary life table premium at age twenty-one is 
$17.90 per $1,000, reduced by dividends. These dividends, 
improperly so called, are not profits, but savings derived 
from three sources : 

"1. Collection of an interest rate greater than the as- 
sumption. 

"2. A saving upon mortality. 

"3. A saving upon expenses. 

"The salvage from these items, as it might be termed, 
is, in a mutual company, ordinarily applied in reduction of 
the gross premium. To simplify our illustration, however, 



376 FUNDS AND THEIR USES 

I will, with your permission, dismiss further consideration 

of dividends and assume that there are none. 

"Let us, then, turn back to the annual premium, age twenty- 
one of $17.90 

Deduct from this the apportionment for expenses, called the 

'loading,' which is 4.63 

Leaving the net premium $13.27 

Out of this net premium is provided the cost of the first 
year's insurance 7.05 

The difference . . $6.22 

is the sum laid by at interest as the year's contribution 
to the reserve, reducing the amount at risk from $1,000 
to $993.78. 
When this insured member has reached the age of fifty, he 

is charged the same net premium of 13.27 

The cost of insurance for this year has increased to. . . . 10.10 

Leaving contribution to 'reserve' $3.17 

" Previous years' additions, plus interest, have raised 
the reserve on this policy to $303, which, deducted from 
$1,000, the face of the policy, has diminished the amount 
at risk to $697. 

''The insured member having" attained the age of seven- 
ty-five, is still charged the same net premium of $13.27. 
His reserve has now reached $680.07, which, deducted from 
the face of the policy, $1,000, has brought the amount at 
risk down to $319.93, but at his advanced age the year's 
charge for mortality upon even this small sum has become 
greater than the premium available. 

1 ' The account is then made up as follows : 

"Reserve at the end of the previous year $680.07 

Net premium, as before $1 3.27 

Interest added to the reserve 27 73 

Total 41.00 

Which also added to the reserve makes a grand total of . . . . $721.07 
Deduct the estimated cost of insurance for the current year 

upon $319.93 27.06 

and you have a balance or reserve of $694.01 

reducing the sum yet at risk to $305.99. 



THE INSURANCE COMPANY 377 

"The same process is continued until age ninety-nine, 
when, under the actuary's table, with 4 per cent interest, 
the reserve equals the face of the policy. The various 
tables used are not identical, the American table, for in- 
stance, stopping at age ninety-five." 

Application of the two principles of life insurance. — 
Many kinds of policies are offered involving combinations 
of assessment and reserve, of endowment and annuity, or 
ordinary life, tontine, and other plans, but through them 
and in them all may be found one or both of these two prin- 
ciples. The "level premium" plan, with its reserve, offers 
to the insured a perfect security against loss whether mem- 
bership increases or decreases so long as the reserve be 
perfectly protected, and the laws of the several States 
have been framed to secure this end. The rate of insur- 
ance on the level premium plan for the earlier years of 
the policy is higher than that of the assessment or "natural 
premium" plan, yet with this increased rate it offers a se- 
curity which eliminates speculative risk involved in the 
futurity of the company itself. 

Other plans of organization and adaptations to particu- 
lar lines of insurance might be discussed, but the few pages 
here given to the subject will allow of nothing more than 
a presentation of principles involved. The enormous re- 
serves kept by the life-insurance companies; the capital 
and surplus invested in fire, marine, and other forms of 
insurance organizations; the resources that are deemed 
essential to security and to the elimination of the element 
of speculation from a business whose purpose it is to take 
over the burdens of speculative risks, have all contributed 
to make insurance companies the largest investors and the 
most conservative financial concerns in business life. The 
assets in the hands of 200 life-insurance companies report- 
ing in the Life Insurance Compendium in the Insurance 
Year-Book 1920-2 on January 1, 1921, amounted to $5,404,- 



378 FUNDS AND THEIR USES 

024,039. These companies have a premium income of 
$1,336,566,364 per annum, and from their investments an 
additional income in the form of interest and rentals 
amounting to $441,345,993, making a total annual income 
of approximately $1,800,000,000. The total life insurance 
in force of these 200 companies on this date was $34,340,- 
343,077. Besides this there was over $7,000,000,000 of 
industrial insurance. 

The assets of fire insurance companies on January 1, 
1921, came to a total of $1,598,751,499. The premium in- 
come was $1,020,241,864, and the total income $1,102,788- 
799. In 1920 the risk of loss by fire assumed by these com- 
panies amounted to over $100,000,000,000. Besides this, 
casualty and fidelity insurance was done to the extent of 
$386,871,317 of earned premiums. These statistical exhibits 
indicate the impressive volume of funds in the hands of 
insurance companies, and the astounding mass of wealth 
and human earning power insured. It is safe to say that 
over $150,000,000,000 of risks were undertaken in the 
United States alone by insurance companies in 1920. The 
annual income has increased 42 per cent since 1910. This 
carries on the extraordinary growth in annual income since 
1890 as indicated in the following table: 

Annual Income of Life Insurance Companies in the 
United States 

1890 $ 196.938,069 

1900 400,603,258 

1910 781,011,249 

1920 1,847,264,206 

The expense of management for the years 1910 to 1920 
increased from $540,342,426 to $1,198,366,113. The excess 
of income over expenditure, including death losses, for the 
same years show the following remarkable increase : in 
1910, $240,668,823; in 1920, $648,898,093. This excess of 
income over expenditure indicates the enormous increment 



THE INSURANCE COMPANY 379 

that is annually being added to life insurance funds. 
Within the ten years above mentioned the admitted assets 
of the companies now operating increased from $3,875,- 
877,059 to $7,319,997,019 ; in other words, within ten years 
nearly three and one-half billion dollars have been added 
to their assets. 

These assets are very largely held in the form of invest- 
ments. A classification of investments of two large insur- 
ance companies is as follows : 

Classification of Investments of Two Large Insurance 

Companies 

Real estate $ 28,560,590 

Mortgages 357,703,046 

Bonds owned 

Stocks owned 

Collateral loans 403,912,728 

Premium notes and loans 61,723,752 

Total .-...■ $931,900,116 

Real estate $ 8,407,481 

Mortgages '. • 164,796,226 

Bonds owned 602,665,509 

Stocks owned 305,736 

Collateral loans 6,565,500 

Premium notes and loans 147,500,434 

Total $930,340,886 

The cash items of insurance companies. — Besides these 
items there appears among the assets of companies what is 
termed ' ' cash in office and in bank. ' ' This item for the two 
companies given above amounts to $9,914,858 in the first 
instance and $11,053,529 in the second. The item has a 
peculiar status. The laws of the several States require the 
insurance companies to make a statement of investments, 
assets, liabilities, etc., in order that there may be a pub- 
lished record of their doings. Furthermore, the various 
States have appointed special officers for the investigation 
of the condition of insurance companies for the protection 
of policy-holders. In the rivalry between insurance com- 



380 FUNDS AND THEIR USES 

panies a point is made of the character of their assets. 
Nearly all of the insurance concerns make advances to their 
agents. With the numerous agencies scattered through the 
country small advances made to each will amount to mil- 
lions in the aggregate. In order that these advances may 
not appear in their true light — in other words, that it may 
not be placed on record that they are doing business in this 
way — many of the large insurance companies, being in con- 
trol of banking institutions, take to the banks under their 
control the notes of the various agents on which advances 
have been made and, for the purpose of the statement made 
to the public, temporarily discount these notes and have 
the amounts entered to their account as cash credits. These 
are then canceled by the return of the notes when con- 
venience may serve after they have performed the service 
intended. While this may, in ordinary business experience,, 
be considered an illegitimate practice, yet the practice itself 
has arisen very largely out of the rivalry between com- 
panies and the tendency of certain unintelligent inspectors 
to interfere in what may be considered a legitimate busi- 
ness arrangement, and one which does not necessarily jeop- 
ardize any of the interests of policy-holders or of stock- 
holders. 

Insurance companies as factors in the security market. 
— With the enormous holdings in stocks and bonds, and 
with investments in such securities limited by statute of the 
several States, it may be well understood how it is that what 
are called ''gilt edge" stocks and bonds command a low 
rate of interest or dividend return on market price paid. 
The successful investment agent or investment manager 
of a large insurance company keeps his eyes constantly open 
for opportunity to invest in accredited stocks and bonds 
at a rate that will return to his company an income which 
will produce a dividend to policy-holders and to stock- 
holders. Moreover, a certain pro rata of the funds of in- 



THE INSURANCE COMPANY 381 

surance companies are loaned to speculators on what may 
be termed "call" or "collateral" loans. These have as 
collateral security listed stocks and bonds. The first com- 
pany above cited, for example, has outstanding on collat- 
eral loans $483,912,728. This is not given as typical, but 
as an unusual proportion of assets invested in loans of 
this kind. Most of the large companies, however, carry 
more or less of the obligations of brokers, market traders, 
and underwriting syndicates. Let us suppose that a 
margin of ten per cent is allowed between the market price 
of securities held as collaterals and the amount of advance. 
For a company safely to make loans on a kind of collateral 
that is constantly fluctuating with the movements of market 
price, it is incumbent upon an institution making such 
loans — and most of the old line companies do make ad- 
vances of this kind — constantly to keep watch of the mar- 
ket in order that the margin of safety may not be impaired. 
The usual custom is for such a company to have a corps 
of clerks whose duty it is to keep a constant record of all 
the stocks and bonds in which it is interested. This also 
serves the company as a record from which investment cal- 
culations may be made. Such power have the combined 
insurance companies in the market that were they to con- 
spire to such an end, every financial concern in the country 
might be brought to a condition of distress, possibly of 
bankruptcy. On the other hand, with the strong support 
of such companies the market, financial institutions, and 
the Government itself find in insurance companies the 
greatest financial security. The effect of the enormous 
risks undertaken by the insurance companies, therefore, is 
not only to relieve the business world of speculative uncer- 
tainty in the numerous relations to which it is applied, but 
also, by the financial conservatism adopted to secure this 
end, the investment companies assist very materially in 



382 FUNDS AND THEIR USES 

steadying the market and, in time of strain, relieving finan- 
cial distress. 

Social responsibility of insurance companies ; results of 
Hughes investigation. — The insurance business in the 
last twenty years has developed both in size and in the 
variety of its functions. Beginning with the insurance 
scandals of 1905-7, which were so spectacularly brought to 
light by the Hughes investigation, there has been a ten- 
dency for the State government to restrict the insurance 
companies in their investments, the purpose being to pre- 
vent the exploitation of the huge trust funds by their 
managers. It had become the practice of some of these 
managers to carry loans of friendly financial groups to sup- 
port the market deals and underwritings in which the 
managers themselves might be directly or indirectly inter- 
ested, or to purchase questionable securities from such 
friendly persons or groups. It has become increasingly 
evident that, as in the case of the savings banks, so 
with the insurance companies, there are social responsi- 
bilities which must not be ignored by officers in control. 
And to insure the recognition on the part of these 
officers of their responsibilities, the legislative enactments 
have sought to hedge them in and thus prevent the 
use of funds for enterprises of questionable nature. For 
example, certain large cliques in New York, representing 
vast financial interests, were using the insurance com- 
panies, as a means through which they could control the 
use of tremendous sources of funds accumulating from 
year to year in the form of reserves. Since accumulating 
reserves derived from premiums have cash-surrender value 
which is payable to the holders of the insurance policies, 
such funds are of course, to this extent, a direct liability 
of insurance companies. In a sense, these companies are 
quite as responsible for the payment of the cash-value of 
insurance policies as banks are for the payment of deposits. 



THE INSURANCE COMPANY 383 

But it is easy to see that, where a comparatively small 
amount of money — as in one instance, less than a hun- 
dred thousand dollars — could secure controlling interest 
in the stock of a life insurance company, and such a com- 
pany had control of $100,000,000 of reserves which might 
be used for investment and market trading purposes, that 
there would be very great inducement to men, not over- 
scrupulous, to acquire such control, and then use the vast 
resources at their commands for private gain. In this 
way the capital of many of the largest insurance companies 
was used to promote the attempts of financiers to gain con- 
trol of railroad companies and to promote large industrial 
consolidations. 

It was principally as a result of the Hughes investiga- 
tions that constructive legislation, the aim of which was to 
prevent such misuse of funds, came into being. Thus to- 
day the insurance company is permitted to invest the 
funds at its disposal only in certain kinds of securities. 
The tendency has been toward safer and saner manage- 
ment of these funds; large amounts are used in buying 
first mortgages on good property or in buying farm-mort- 
gage paper throughout the great agricultural regions of 
the country. Another result was the initiation of an era 
of State management of insurance funds, this being one 
of the reactions against the peculations shown to have been 
carried on by managers of the private companies. 

Expansion of new fields of insurance. — Fully as notable 
as the changes in the management of the affairs of insur- 
ance companies wrought by the legislative results of the 
Hughes investigation is the expansion of new fields of in- 
surance. Take, for instance, the casualty risks. In 
December, 1900, the small sum of $27,000,000 represented 
the total net premiums paid to the casualty companies 
operating in the United States. The aggregate assets of 
these casualty companies came to only $66,000,000, and 



384 FUNDS AND THEIR USES 

there were but 57 companies of this character. In Decem- 
ber, 1920, there were 200 companies with aggregate assets 
of $1,640,000,000, receiving premiums amounting to $438,- 
000,000. There are today 50 different kinds of casualty 
insurance, the principal departments being : — workmen 's 
compensation, liability, accident, surety, automobile and 
teams property damage, fidelity, burglary, health, plate- 
glass, and steam-boiler insurance. These rank in the order 
given, according to premium income. Of course, some of 
these forms of insurance are not new ; the fidelity and 
surety insurance were formerly undertaken by trust com- 
panies, but, as we have seen, these activities have been 
largely given up. 

State insurance. — Along with the developments in the 
business of private insurance companies there has gone 
an interesting development of State insurance, above men- 
tioned as a reaction against private control. The largest 
venture in Government management of insurance funds 
was incident to the extraordinary hazards of the war. The 
act of September 2, 1914, hardly a month after the war 
began, gave authority to the Secretary of the Treasury, 
through the Bureau of "War Risk Insurance, to issue in- 
surance on American vessels and their cargoes. This was 
a temporary measure, but has been continued by subse- 
quent acts since the end of the war. By June 30, 1918, 
over $43,000,000 had been paid in premiums to the Gov- 
ernment for marine insurance, whereas losses amounted to 
only $29,000,000. At that time the Government had as- 
sumed risks amounting to $1,245,000,000. 

The act of October 6, 1917, created the Military and 
Naval Division of the Bureau of War Risk Insurance, which 
provided: (1) allotment of pay and family allowance, 
which took care of dependents, whose suppo i: w^ with- 
drawn by the absence of men in the army; (2) compensa- 
tion and indemnity for death or disability; (3) insurance 



THE INSURANCE COMPANY 385 

against death or total and permanent disability. Compen- 
sation for death or disability was provided for all members 
of the United States military and naval forces. This cor- 
responded to the compensation demanded by law of em- 
ployers in behalf of employees injured in hazardous occu- 
pations — dealing in this case with the relation between the 
Government and its enlisted men. The third provision 
for insurance made it possible for soldiers and sailors to 
insure themselves by paying premiums. The Government 
did a life insurance business, offering to its military and 
naval forces insurance up to $10,000 per individual, at 
premium rates based upon the American Experience Table 
of Mortality, and 3% per cent interest, representing only 
the actual cost of the insurance. The total amount applied 
for October, 1917, to October 31, 1918, was approximately 
$36,000,000,000, an amount larger than the total carried risk 
by all the companies in the United States. The estimated 
premium requirement to carry this risk by the Government 
was $143,000,000 per year. 

In this social insurance there has been cooperation be- 
tween private insurance companies and the Government, 
which bids fair to greatly increase in the future. It is 
probable that there will be an extension of insurance 
similar to that provided for enlisted men, as a protection 
of all civilian employees of the Government, a develop- 
ment of insurance for Government employees as well as 
for all citizens, as a protection against ill health, and the 
establishment of State health insurance and State insur- 
ance of industrial workers against old age or invalidity, 
accident or death, especially for those whose wages or in- 
comes will not permit them to make an equivalent provision 
for themselves and their families on a voluntary basis. 



CHAPTER XVIII 

THE BROKER AND THE BROKERS' BOARD 

The note-broker.— A broker is a special agent employed 
to make purchases or sales for another — his principal. Mr. 
Wanamaker wishes to borrow $500,000 for sixty days, with 
which to make payment on a cargo of goods received from 
Paris. No one person or bank might at the time have that 
amount of funds free for investment in sixty-day paper ; 
moreover, from considerations of safety, it is the policy 
of banks and other note-buyers not to have a large pro- 
portion of their funds invested in the paper of one person 
or business firm. To find purchasers for this amount of 
paper on favorable terms would require Mr. Wanamaker 
to leave his business house and spend time elsewhere which 
he might profitably use in his office. Instead of doing this, 
he goes to a note-broker — a man who makes it his business 
to find customers of this kind, one who keeps in touch with 
the note-buying constituency. The broker knows the kind 
of paper that the banks and other note-buyers usually take, 
and about how much; at this time, in fact, he may have a 
long list of buyers' wants scheduled on his books. For a 
small commission he undertakes to sell the notes for Mr. 
Wanamaker. Turning to the orders of buyers scheduled 
on his books, he first satisfies these by setting apart enough 
to fill them. Let us suppose that he already has customers 
for $200,000 of this kind of paper. He then takes down 
his " 'phone," and, by calling up one prospective buyer 
after another, has the whole remaining amount disposed of 

in half an hour. His delivery clerk is then sent out with 

386 






THE BROKER AND THE BROKERS' BOARD 387 

the notes, who, in exchange, brings back customers' checks, 
which are deposited; thereupon remittance of the amount 







L^IS&U* 



S2&&LSft4>fai s>*t.*C 







7*h./ft&ue^t< f£ 



**r_ 




Fig. 111. — Commercial Broker's Note. 

of funds raised is made to Mr. Wanamaker for settlement 
with his Paris house. The notes usually handled by com- 
mercial paper brokers for large houses are made in uni- 
form amount of $5,000 each. They are drawn to the order 

LETTER OF RELEASE. 



Philadelphia, = 189 

■$OT and in consideration of the sum of one dollar, to us in hand paid, the receipt 

whereof is hereby acknowledged, — — 

agrees to release, and hereby does release, — . 

from all liability as endorsers on a note of — ' 

dated. in the year eighteen hundred and ninety'- 

due in the year eighteen hundred and ninety- — , ,.- 



for Dollars, 

and the said further agrees to hold the said endorsers. 

harmless on said note. 

Witness: _ _ 

Fig. 112. — Form of Letter of Release. 

of the " maker," and without indorsement are what is 
known as one-name paper. When not executed to the order 



388 



FUNDS AND THEIR USES 



of the maker and a dealer wishes to protect himself, he 
secures a release from responsibility on indorsement. The 
manner of conducting a transaction through a "commer- 






V^ spfyf 







&4 *?* 






S&3 




^^W--^^ 



Fig. 113. — Broker's Memorandum of Purchase for Customer's 

Account. 

cial paper house" is illustrated by the following state- 
ments of account : The first represents that Bodine, 




Fig. 114. — Broker's Memorandum of Sale for Customer's 

Account. 



THE BROKER AND THE BROKERS' BOARD 389 

Altemus & Co. on May 29, 1902, bought of John Smith 
& Co. a note executed by John Jones & Co., bearing interest 
at 4% per cent, due September 30, following ; that the 
note runs 125 days, which at 4% per cent amounts in in- 
terest to $104.17. Allowing for commission 14 per cent, 
and discount, the total deduction to be made from the 
face of the note equals $90.63. This leaves a net cash pay- 
ment of $4,909.37 on purchase of the note. The second 
statement is one of sale by Bodine, Altemus & Co., by 
which it appears that the terms were exactly the same as 
those of purchase, except that no commission is charged 
as the buyer pays that. 

Exchange-broker. — Upon receipt of the $500,000 in 
funds — the proceeds of the note sale — Mr. Wanamaker has 
another problem to solve, viz., ''How is this amount of 
money to be transmitted to Paris?" This may be done 
by drawing that amount of gold out of the bank in New 
York where his account is kept, and sending it by express 
to the parties from whom purchases of goods were made. 
This would cost him in ordinary times about $2 per thou- 
sand or $1,000 for transportation charges. If $500,000 
of the bills of New York merchants against merchants of 
Paris can be found, he may buy these and then send them 
to his Paris banking-house for collection. By so doing the 
cost of transporting gold to Paris would be avoided; at 
the same time the Paris merchants would avoid the cost of 
sending a like amount of gold back to New York. The 
matter of finding such bills against Paris merchants is 
given over to an exchange-broker. The exchange-broker, 
who has a constituency which has foreign bills for sale, 
telephones around from place to place, and within a short 
time has the desired amount. For a commission amount- 
ing to a small fraction of the cost of shipping gold, $500,000 
of good trade bills are obtained. 

The stock-broker. — After the goods have been sold, Mr. 



390 FUNDS AND THEIR USES 

Wanamaker may have $100,000 that he has no immediate 
use for in his business, and he decides to invest the amount 
in stocks and bonds. Looking over the securities of com- 
panies on the market, he makes up his mind that Chicago, 
Burlington & Quincy Consolidated 7 per cent of 1903, @ 102, 
Chicago & Northwestern Sinking Fund 6's of 1929, @ 115, 
and Central of New Jersey, common, @ 150, will make 
good investments if they may be had at the prices named. 
But he does not know any one who has any of these for 
sale at these prices. To obtain these investments he leaves 
an order with a stock and bond-broker. The order is to 
buy any of the stocks or bonds on the market at the prices 
named. At the time that the order is given none of them 
may be offered at the price ; but within two weeks the 
money market becomes close, and some of the holders of 
securities are willing to sell at such figures that the order 
may be executed. The broker charges one-eighth of 1 per 
cent for buying the bonds and anywhere from $7.50 to $20 
for the sale of 100 shares of stock, depending upon its price. 

The produce-broker. — Again, Mr. Wanamaker, being in- 
terested in a textile factory at "Worcester, may wish to pur- 
chase a stock of cotton for the year. He has contracts for 
cloth to fill, and desiring to take advantage of a present 
market for materials for manufacture, he places an order 
with a cotton-broker for 500 bales at 5 cents per pound. 
In like manner, a person desiring wheat or corn will go to 
a grain-broker; another, desiring petroleum, will go to an 
oil-broker ; one wishing to lay in a supply of coal may deal 
with a coal-broker, etc. Any property or commodity that 
has a central market may be the subject of a broking 
business. 

The Brokers' Board. — The business of broking has given 
rise to a peculiar form of institution known as a Brokers' 
Board. In early days the stock and bond-brokers did busi- 
ness in much the same way that coal-brokers or real-estate- 






THE BROKER AND THE BROKERS' BOARD 391 

brokers do to-day. On receiving a consignment for sale 
they would go out on the street to find purchasers ; or, re- 
ceiving buying orders, they would go about from place to 
place to find owners who had stocks and bonds of the kind 
wanted, and which might be obtained at the prices offered. 
The result of a morning 's canvass, however, might give but 
small return. Coming to the coffee-house for luncheon, they 
would meet other brokers who also had buying and selling 
orders. It was found by experience that more business 
could be transacted at luncheon or during a half -hour meal- 
time smoke with brokers than by a whole day's canvass. 
The advantage of bringing together the buying and selling 
wants of a community at a meeting of brokers caused them 
as by common consent to meet at a central coffee-house to 
transact their business. But this was oftentimes unsatis- 
factory on account of the unreliability of some of the 
traders. The result was that, as business increased, an 
association was formed with rules governing it which would 
insure honorable dealings among members, and at the same 
time give to each member the advantage of meeting the 
leading brokers of the place. 

History of stock exchanges — Philadelphia. — The Phila- 
delphia Stock Exchange had its beginning at a coffee- 
house. The sales of Government bonds and of stocks in 
the newly organized companies after the close of the Revo- 
lution was the business which brought it forth. 

The London Stock Exchange. — London stock-broking 
began with the foundation of the national debt under Wil- 
liam and Mary. Large corporate trading companies had 
been organized before this time, but the stocks were not 
traded in to such an extent as to give rise to a regularly 
organized broking business. With the flotation of the 
bonds issued for the purpose of raising funds to carry on 
the wars against France, and the appeals made to the 
public for investment in these stocks, stock-jobbing became 



392 FUNDS AND THEIR USES 

a regular business in London. This was soon followed by 
the flotation of shares in companies organized for taking 
advantage of the new territory made free for British ex- 
ploitation after the success of the English armies on the 
Continent. The South Sea Bubble was only one of the 
projects that gave rise to the issues of shares which flooded 
the London market and made the business of broking one 
of the most important branches of enterprise established 
in the eighteenth century. The London brokers first found 
rendezvous in the Royal Exchange, a building erected dur- 
ing the reign of Elizabeth as a meeting-place for merchants. 
In 1698 these quarters were found too small, and were 
consequently abandoned. For a number of years brokers 
collected in a place made famous by them, which has since 
been known as " Change Alley." A coffee-house opening 
on this alley was their favorite retreat for social and finan- 
cial chat. 

The New York Stock Exchange. — The New York brokers 
found their first central meeting-place at what has gone 
down in history as the ' ' Tontine Coffee-House, ' ' at the cor- 
ner of Wall and Water Streets. New York, like Phila- 
delphia, early became a center of financial interest and, 
with this, for the business of stock-broking. Much con- 
flict had grown out of the variety of commissions Charged 
in the early transactions and the irregular dealings of 
brokers. The beginning of the New York Stock Exchange 
dates from a meeting of twenty-four brokers under a tree 
which grew opposite No. 60 Wall Street. This agreement is 
dated May 17, 1792, and is one providing for uniform com- 
missions among the contracting parties. The force of such 
an agreement was to control the market, since the signers 
confined their trading operations to those who would con- 
form to it. It was not until 1817, however, following the 
growth of corporations after the War of 1812, that a formal 
organization was effected. As business increased, with the 



THE BROKER AND THE BROKERS' BOARD 393 

floating of bank, canal, and railroad stocks, the outside 
brokers organized what was known as the "Open Board 
of Brokers." This was absorbed by the New York Stock 
Exchange in 1868, membership in the latter being in- 
creased to accommodate that of the older organization. 
During the Civil War a special class of business grew out 
of the necessity for gold purchases and gold sales for for- 
eign trade, and for the payment of the obligations of the 
Government. The "Gold Board," as the association of 
brokers having charge of this class of business is called, 
was incorporated as a part of the Stock Exchange in 1879. 

The Consolidated Stock and Petroleum Exchange. — 
Later the New York Mining Stock Exchange was estab- 
lished, to accommodate the business growing out of the 
speculative mania for mining shares in the '70 's ; and with 
the discovery of Leadville and other Colorado districts, a 
second board, called the American Mining Stock Exchange. 
The decline of the popularity of mining stocks forced these 
bodies to look for some other branch of business. The fast- 
growing demands for petroleum gave them an outlet. In 
1885 the two mining -exchanges consolidated with the old 
Petroleum Exchange as the Consolidated Stock and 
Petroleum Exchange. 

The so-called Curb Market, which for long years held 
its noisy meetings in Broad Street, has recently moved 
into a new building especially erected by the association 
and now numbers about five hundred members. New 
York, therefore, has three large Stock Exchanges as meet- 
ing places for brokers handling stocks and bonds. Not all 
the business, however, is done on the floors of these three 
Exchanges. A considerable amount of business is trans- 
acted "on the Street" by brokers who have no member- 
ship in any organization but act as go-betweens among in- 
vestment houses and dealers in securities, their transactions 



394 FUNDS AND THEIR USES 

being generally in blocks of bonds owned by institutions 
or in the less current bonds and investment stocks. 

Organization of a stock exchange. — A stock exchange 
need not be a corporation. The New York Stock Exchange, 
for example, is only a voluntary association of members. 
It must, however, be well organized. It must exercise com- 
plete control over those who enjoy its privileges, for it is 
out of the regularity of transactions that its advantages 
accrue. In the New York Stock Exchange there is a mem- 
bership of 1,100. As the membership is full, one may ob- 
tain a seat only by purchasing it from a member. One can 
not become a member, however, until he has passed the 
most careful scrutiny of the Membership Committee re- 
garding his credit, his financial responsibility, his business 
association, his reputation for honesty and fair dealing. In 
addition to the usual incentive for honesty in business, 
therefore, the stock-broker has the price of his seat as well 
as his whole opportunity for doing business staked on ob- 
servance of business propriety and honorable conduct. No 
other class of men has the quality of business honor so 
highly developed. For contracts involving millions of 
dollars, only individual pencil memoranda are made, and 
deliveries of securities and remittances are conducted on 
these memoranda with the utmost confidence that contracts 
concluded by "finger-talk" will be fulfilled without ques- 
tion. The only possibility considered by members of the 
board is one of mistake, and, as a precaution against this, 
an office clerk is sent out at the end of each day's business 
to compare notes with houses dealt with, upon comparison 
of which errors made are corrected without conflict or con- 
troversy. 

Organization of the Philadelphia Exchange. — For 
illustration of plan of organization, the Philadelphia Stock 
Exchange may be used. At the head of the Philadelphia 
Stock Exchange is a president, who opens and closes the 



THE BROKER AND THE BROKERS' BOARD 395 

board at the regularly prescribed time ; lie preserves order, 
announces failures of members, gives notice of contracts 
unfulfilled, and attends to their execution under the rules 
of the board. The board opens at 10 a. m. and closes at 
3 p. m. Deliveries must be made before 2.15, except on 
purchases and sales for cash. The board has various com- 




Fig. 115. — Interior of New York Stock Exchange. 

mittes to look after different departments of business and 
to see that its rules are properly complied with. These 
committees are as follows : 1. A Governing Committee, 
consisting of 21 members, one-third of whom retire each 
year. This committee has general supervision of the affairs 
of the association, and is the court of final resort. 2. A 
Finance Committee, consisting of five members, which has 
charge of the funds of the exchange and the investment of 
any surplus funds in the treasurer's hands. 3. A Build- 



396 



FUNDS AND THEIR USES 



ing Committee of three members, which has supervision 
and control of the home of the board — has charge of re- 
pairs, service, etc. 4. A Committee on Admissions, con- 
sisting of five members, to whom all applications for mem- 
bership, for transfer, or readmission of suspended mem- 
bers are referred. 5. An Arbitration Committee, consist- 
ing of seven members, whose duty it is "to investigate and 
decide all claims and matters of difference between mem- 
bers of the exchange which may be brought before it, aris- 



H'tidadetphia Board' j NiVeu/ \York Hoard' SNew York Board' 
' Elevattd Board Stage ' 




Fig. 116. — Sketch Showing Layout of Floor of 
New York Stock Exchange. 



ing from transactions in bonds, bullion, stocks, or other 
securities, or from any transactions in money. ' ' This is 
one of the most important committees in the organization ; 
it serves as an inner court, so to speak. Like the courts 
established for the government of the old incorporated 
trading companies, it so far controls the conduct of mem- 
bers and arbitrates differences between them that it is sel- 
dom any matter of controversy gets before the regular 
courts of law. Upon their decisions are built up rules and 
precedents which constitute a code for business transac- 
tions, and which by practice and common consent regulate 



THE BROKER AND THE BROKERS' BOARD 397 

the practices of those outside of the board and find a final 
place in the written decisions of the courts of record. 

The floor arrangements and office appointments of 
brokers. — By reference to the plan on page 396, an idea 
may be had of the floor arrangement of a board. A large 
part of the floor space is encumbered with nothing but what 
are called trading-posts. These, as the name suggests, are 
posts set up on the floor around which certain kinds of 
stocks may be traded in ; as, for example, one post may be 
for railroad stocks, another for iron and steel stocks, an- 
other for municipal bonds, etc. (see posts numbered 1 to 8 
in illustration). One having stocks or bonds for sale or 
purchase goes to the post where such stocks are traded in 
and cries out his ' ' offer, " if he wants to sell, or his ' ' bid ' ' 
if he wishes to buy. It is the offering and bidding on the 
floor of the board around these posts, or, in the case of a 
produce exchange, in the ' ' pits, ' ' that causes the uproar so 
often remarked upon. The board is simply an auction- 
room, in which every member is an auctioneer as well as 
a possible customer. As a board is a central point to which 
are brought the buying and selling demands of a great 
city or of a country, on the floor of the board may be heard 
the concentrated outcries and the uproar of auctioneers 
of the many places which otherwise would be dealing in 
stocks and bonds; it is this that makes a board-room seem 
so much like bedlam. On the floor will be found the 
brokers representing the member houses. At one side of 
the room are private boxes, in which will be found the 
clerks or operators, w T ho have direct communication with 
the offices of members trading on the floor. Prom these 
private boxes the business of the offices will be communi- 
cated to the floor-man, and purchases or sales on the floor 
will be returned to the several offices. On the wall of the 
Philadelphia Exchange, beside the president's chair, is 
also an electric indicator, on which will be found consecu- 



THE BROKER AND THE BROKERS' BOARD 399 

tive numbers representing the various trading numbers of 
members on the board floor. When a member on the floor 
is wanted, a button is pressed and a light flashes out the 
number of this member, to which he at once responds. The 
member on the floor, therefore, has to have his eye con- 
stantly turned toward the indicator as well as keep in mind 
the whole trading situation on the floor ; besides, he must 
keep in touch with the business demands of the office, 
When business is brisk this is a difficult part to play. On 
a side-wall of the board-room will be recorded the transac- 
tions (purchases and sales) of the local market, as well as 
those of other leading boards. 

Organization of the broker's office. — The facilities for 
business and the business transacted on the several boards 
are very largely dependent upon the organization of the 
broker's office. Customers are not allowed on the floor of 
the Exchange. They operate in the office of the broker 
in what is known as the Board-Room, so-called because of 
a board, either of slate or wood, which occupies usually the 
whole side of the room and on which the latest quotations 
are marked up as they are read off the ticker. A word 
here concerning the actual methods of executing orders 
by a modern Exchange house seems appropriate. Accuracy 
and speed are the two factors most carefully watched and 
constantly striven for. An order wrongly executed or 
tardily entered may cost the house both a client and money. 
An order received by mail, wire, 'phone or in person is 
immediately time-stamped in order to guard against any 
eventual question as to when the order was given or re- 
ceived and is forthwith telephoned to the Exchange. As 
soon as executed, the order is reported back to the office 
and the time of execution again stamped. In addition to 
this, a time clock is attached to a ticker which stamps every 
minute in red and thus helps to check up the time when a 
trade was reported. So quickly does all this work that 



400 



FUNDS AND THEIR USES 



it is merely a matter of seconds for orders on active issues 
to be given, executed and reported to the customer. It is 
on record, that an order sent over the private wire of a 
New York Stock Exchange house from their correspondent 
in San Francisco, was telegraphed from that point, exe- 
cuted, and report received in San Francisco in 56 seconds 
after sending. The private wire business has increased 
enormously during the last twenty years, and it was re- 
cently estimated that there were 500,000 miles of wires, 
representing a yearly expenditure of over $15,000,000. 







Fig. 118. — Quotation Board in Broker's Office with Ticker. 



These private wires extend from New York to San Fran- 
cisco and from Chicago to New Orleans, tapping prac- 
tically every financial center of importance in the country. 
(For a chart of the wires of one of the largest branch 
office businesses in the world see page 406.) Through the 



THE BROKER AND THE BROKERS' BOARD 401 

organization of the broker's office, the customer is in pos- 
session of the facts of the market practically as soon as the 
broker himself. The latter is also in touch with the office 
members of the firm. (See full-page illustration of the 
interior of telegraph office of the central telegraph room of 
a branch office house on page 398.) 

The orders of customers for purchase and sale come in 
from all parts of the country to the central markets. The 
facilities given to making purchases and sales, the ar- 
rangements for the distribution of market quotations and 
transactions on the various central exchanges, bring with 
them a class of dealers who endeavor to obtain an income 
from taking advantage of market fluctuations. It is opera- 
tions of such character that distinguish speculation from 
investment. 

The speculative constituency. — If one should go to a 
broker's office day after day, there would be found a con- 
stituency, in the chairs of his board room, or going in and 
out, who keep an eye on the market, to whom may be 
traced a very large portion of his orders. The manner in 
which a market may be affected by speculative purchases 
may be seen by glancing at the chart on page 406, which 
shows the private wires of a single large branch office con- 
cern. In these several offices are the springs which, as they 
flow out in rivulets along the wires, communicate and swell 
until they make up a stream of orders which flows into the 
main office for execution, and which finds its way into 
the general pool on the floor of the Exchange. When fluc- 
tuations are great then trade is brisk. This is a common 
observation. Yet this trade is very largely a speculative 
one, and as fluctuations rise and fall, the capital which is 
used for speculative margins becomes gradually absorbed. 
The test of one's ability to remain in the speculation is 
found in his ability to keep his margins good. With these 
speculative orders pouring in there is a constant flow of 



402 FUNDS AND THEIR USES 

capital toward the financial centers, which finally find their 
way into the conservative financial institutions. The capi- 
tal drawn from the purses of the speculating multitude 
finds final employment at the hands of the few who have 
the prudence and judgment necessary to conservative com- 
mercial and industrial undertakings. 

The bucket shop. — As a means of accommodating specu- 
lators who are unable to trade on large margins and yet 
who are anxious to gamble on the turn of the " wheel of 
fortune" in the market, a class of business was organized 
which had its center in the "bucket shop." This was 
nothing more or less than a room in which quotations were 
given representing the fluctuations of the market which 
allowed one to take chances on price movements. In this 
it does not differ from the regular speculative business in 
the broker's office, except that the room is usually crowded 
with petty gamblers, instead of having in it only a few 
investors or speculators who may have dropped in to 
"sense" the market while trading in the usual way. (For 
illustration of interior of large bucket shop see page 405.) 
The methods differed, however, in this : the ones conducting 
the office or "bucket shop" were not in any manner regu- 
lated by a board; they did not have their commissions 
determined by association rules; and they took mar- 
gins of any amount. Instead of having a wire or ticker that 
gave the official quotations of the central markets in a 
language that might be understood, and which was open 
to inspection, the bucket shop had a private wire over 
which quotations were received by a telegraph operator. 
(For illustration of bucket shop private wiring, see p. 403.) 
These communications could not be read by the customer, 
as in the case of the tciker, and therefore the operat- 
ors were the only ones who had knowledge of what was 
going on. At one window, therefore, was stationed a margin - 
taker — one who took the money of customers and recorded 






404 FUNDS AND THEIR USES 

the chances taken. The customer took a seat in the room 
and watched the board for movements in his stocks until 
by the market going down his margin was wiped out or 
on a rising market he would take his profit. Thus gambling 
in New York Central the stock went irp two points. The 
man who sat at the instrument, beside the clerk who had 
recorded his bid, called out to the boy at the board what 
New York Central was doing. The office had it entirely 
within its own power to say whether New York Central 
went up or down. The customer, therefore, was in a gam- 
bling house which played with loaded dice. Inasmuch as 
speculation is in itself a hazardous undertaking, it may 
quite fairly be asked, "Why tempt Providence by playing 
the game through the so-called bucket shop ? So fully 
has this been realized by the authorities in New York State 
that they have endeavored to stamp out this bucket shop 
evil in the State and they have been very successful in so 
doing. Unfortunately, however, bucket shops still flourish 
in the smaller ceuters of the country where it would not 
pay for the representative Exchange house to have a 
branch. Because, however, of the many private wire sys- 
tems which have their tentacles all over the country, it is 
generally easy to reach a regular Exchange house. The 
narrower margin and the small bets which may be made in 
the "bucket shop" type of dealing, however, keeps a rem- 
nant of the practice still alive even in the large cities. 
During the year 1921, a New York bucketing house failed 
with liabilities amounting to $5,000,000 and with almost 
no assets. 

Distinction between investment and speculation. — An 
investor is one who purchases a property or business in- 
terest outright as a result of judgment based on "what 
the concern has earned." His profits may come from a 
rise in value of the property, or from income in the form 
of interest or dividends, but in the last analysis it is de- 




§ 

w 

a 
M 

P 
PQ 

o 

M 

<1 

o 

ca 
o 

t-H 
« 



O 



O 
15=. 



406 



FUNDS AND THEIR USES 



pendent upon the income or prospective income of the 
property. The speculator, however, cares not what may- 
be the income-producing power or earning capacity of a 
business concern. All that he is interested in is the market 




Fig. 121. — Map of Private Wire Connections of One of the 
Largest Branch Office Houses. 



THE BROKER AND THE BROKERS' BOARD 407 

fluctuation of the securities of the concern — that is, of 
the bonds, or stocks. It makes no difference to him whether 
the property becomes more or less valuable so long as he 
may place himself in a position to take advantage of the 
rise or fall in the fluctuations of the company's securi- 
ties. Since this is his end, and what one may call his 
business, it »is, usually, not to his advantage to purchase 
and pay for the securities outright. Rather is it to his 
advantage to use his trading capital that he may purchase 
as large a block of stock or other property as is possible 
for the purpose of getting the benefit of the change in 
price. He, therefore, buys on a margin for such a time as, 
in his judgment, will allow of a fluctuation in his interest. 
It is this kind of buying that gives rise to a large part of 
the business of broking. It is to this class of transactions, 
also, that much of the financial uncertainty and misfortune 
of the past and the present is attributable. 



INDEX 



Accommodation credit - the - 
drawer note, 127 

Accommodation mortgage, 167 

Accounts, how to authorize 
others to draw on one's, 67 

— instruments for the collection 
of credit, 142 

— paid, 145 

—settled, 144, 145 

— stated, 143 

Advice of sale of draft, 156 

Agricultural credit. See Agri- 
cultural credit institutions. 

Agricultural credit institutions, 
bibliography, 364 

— credit operations, 342 

— distinction between agricul- 
tural and rural credit, 342 

— financing foreign shipment 
of grain, 346 

— methods of financing move- 
ment of cotton crop, 347 

— negotiable bill of lading, 344 

Aldrich-Vreeland Act, 256 

American Express Company, 
success of the, 77 

Assessed stock, 114 

Assessment insurance, 373 

Auction, sales at, 331 

Bank, absence of rediscount 

system, 255 
— acts as bullion broker, 238 
— acts as trustee, 235 
— allows customers to convert 

"business credit" into 

"bank credit," 234 



409 



Bank— Continued 

— bibliography, 249 

— binds together and enlarges 

business relations, 238 
— buys and sells foreign 

moneys, 237 
— dual system of, 252 
— early regulations, 250 
— equipment of, 240 
— exchanges "bank credit" for 

money, 233 
— farm mortgage, 351 
— farm-mortgage loans, 357 
— Federal Land, 359 
— furnishes current funds in 

form of "bank credit," 233 
— inadequacy of reserves, 252 
— inelasticity of the National 

bank notes, 254 
— kinds of investment that may 

safely be made, 244 
— money reserve, 241 
—Morris Plan, 339 
—National, 250 
— National, inadequate, 251 
— ordinary demands for money, 

241 
—panic of 1907, 253 
—profit of the, 239 
— profits arise out of exchange 

of "demand" for "time" 

credit, 239 
— profits based on investment 

of credit, 242 
— salable credit of the, 242 
— sells exchange, 236 
-serves as agent for presenta- 



410 



INDEX 



Bank — Continued 

tion and collection of 

"business credit," 235 
—State, 275 

Bank accounts, deposits, 48 
Bank check, usual form of 

country, 60 
Bank, commercial, necessity for 

current funds in industry, 

231 
— obstacles to business without, 

232 
Bank credit, 45, 233 
Bank credit money, 221 
Bank draft, 72 
Banker. See Investment 

banker. 
Base metals, 19 
Bill, a documented, 153 
Bill, invoice, documented, 152, 

153 
Bill of lading, 153 
"Blue Sky Laws," 287 
"Bond dealers," general char- 
acteristics, 292 
— selling methods, 297 
— the buying department of, 

293 
"Bond houses," characteristics 

of, 292 
— the buying department of, 

293 
Bonds, and the small investor, 

300 
— based on lien security, 187 
—car-trust, 190, 192 
— certificate as a receipt for 

certificates deposited for 

refinancing, 175 
— certificate showing part pay- 
ment in stock subscription, 

179 



Bonds — Continued 

— classified according to their 

purpose, 195 
— collateral trust, 191 
— consolidated mortgage, 189 
— convertible, 199 
— coupon, distinguished from 

registered, 197 
— coupon, of farm mortgage 

bank, 355, 356 
— debenture, of financial com- 
panies, 192 
— definition, 174 
- — definition and classification 

of corporate, 187-206 
— difference between corporate, 

and corporate shares, 185 
— distinguished from notes, 182 
— divisional, 189 
— equipment, 191 
—Federal Land Bank, 361 
— form of indorsement, 186 
— general mortgage, 187, 188 
—gold, 197 

— guarantee clause, 184 
— guaranteed and indorsed, 187 
— income, 194, 196 
— individual private, 176 
— indorsement of a negotiable, 

185 
— legal-tender, 197 
— payment and extension of, 

199 
— railroad debenture, 193 
— real-estate, 187 
— real-estate, individual, 183 
— receipt for money deposited 

on purchase of, 178 
— redeemable, 197 
— registered, as distinguished 

from coupon, 197 
— security of, 182 



INDEX 



411 



Bonds — Continued 

— trust company as agent of 
sale and transfer, 177 

— trustees of security, 185 

— unsecured, 178, 180 

— who may be trustees of issue 
of, 185 

Book valuation, 334 

"Breaches of trust," 92 

Brokers, board of the, 390 

— bucket-shop operations, wip- 
ing out, 404 

— commercial note of, 387 

— distinction between invest- 
ment and speculation, 401 

— exchange, 389 

— floor arrangements and office 
appointments of, 397 

— letter of release, 387 

— memorandum of purchase for 
customer's account, 388 

— memorandum of sale for cus- 
tomer's account, 388 

— note, 386 

— organization of the office, 399 

— produce, 390 

— quotation board in office, 400 

— speculative constituency, the, 
401 

—stock, 389 

— wire connections of offices, 
401 

Brokers' Board, 390 

Brown Brothers' traveler's 
checks, 76, 78 

Bucket shop, 402 

Building Loan Associations, an 
investing institution, 325 

— award to bidder of highest 
premium on dues, 331 

—beginning of, 338 



Building Loan Ass'ns — Cont. 

— bibliography, 341 

— conditions out of which the 
institution arose, 327 

— distinguishing features of, 
326 

— figures and statistics of, 328 

— loans at a fixed rate by lot, 
331 

— plans for distribution of 
profits, 332 

— plans for making loans, 330 

— sales at auction, advance of 
interest, 331 

— withdrawal plans, 336 

Bureau of War Risk Insurance, 
384 

Business, bond, requires partic- 
ular men, 298 

— earnings, 304 

— elements of success in, 8 

— every, based on service ren- 
dered, 301 

— expenses, 304 

— formulae of gainful, 301 

— importance of funds in, 5, 10 

— importance of training, 97 

— integrity, 39 

— is organized effort, 9 

— laws of, 7 

— making a profit, 302 

— mortgages on business prop- 
erty, 170 

— necessity for law and order 
in, 6 

— obstacles to, without a bank, 
232 

— profits, 305 

— sale of business interests, 100 

— sale of one interest to capi- 
talize another, 99 



412 



INDEX 



Business — Continued 

— sales of tangible property 

and interests in, 98 
— savings from labor, 306 
— what is, 5 
"Business cycle/' 254 



Capital, increased, results in 
increased profits, 303 

— saving as a means of obtain- 
ing, 303 

— what may be offered for, 96 

Capitalists, 96 

Capital stock, 102 

Carnegie, Andrew, Gospel of 
Wealth, 89 

— investment methods of, 291 

Car-trust bonds, 190-192 

Cashier's check, 70 

Cattle loans, 349 

Certificates, advantages of re- 
ceiver's, 203 

— of indebtedness with no due 
date as to principal, 203, 
205 

— receivers, 200 

— security of receivers, 201 

— stock, 104 

Certified check, definition of, 70 

— usual form, 70 

"Change Alley," 392 

Chattel mortgages, 169 

"Check-book," 63 

Checks, cashier's, 70 

—"certified," 70 

— cheque-bank, 69 

— date of, 60 

— dividend, specially marked, 
65 

— drawing to oneself, 63 

for special purpose, 64 



Checks — Continued 

— drawn to others for special 

purposes, 64 
— English form of crossed, 69 
— entering the name of the 

payee, 62 
— filling in, 61 
— form of money order used as 

traveler's, 79 
— how to authorize others to 

draw on one's account, 67 
— private, to prevent forgery, 

66 
— receipt used as, to avoid 

Stamp Tax, 66 
— safety devices in, 65 
— should be numbered, 63 
— specially designed payroll 

check, 64 
— the check-book, 63 
— the crossed, 67 
— traveler's, 75, 76 
— usual form of cashier's check, 

71 
— usual form of certified, 70. 

See also Customer's Check. 
Cheque-bank check, 69 
Clearing House certificate, 

large denomination, 50 
— small denomination, 49 
Coinage, 214 
Coins, redemption of inferior, 

215 
Collateral, certificate, in mort- 
gages, 174 
— trust bond, 191 
Collateral note, 131 
— judgment, 134 
— with memorandum on back, 

132 
Collection, instruments for 

credit accounts, 142 



INDEX 



413 



Collective certainty, in insur- 
ance, 370 

Commercial drafts, 146 

Commodity paper, 349 

Common stock, 107 

— certificate of, 105, 108 

"Condemnation," 93 

Consignor, draft of, 155 

Consolidated mortgage bonds, 
189 

Consolidate Stock and Petrol- 
eum Exchange, 393 

"Consols," 204 

Contract extending time of 
payment, 202 

Convertible bonds, 199 

Cooperation, 90 

Copper-sheet money, 20 

Corporate bonds, 185 

Corporate shares, 185 

— sale of, 101 

Corporation, difference between 
a partnership and, 104 

— financial advantages of a, 
106 

Coupon bonds, 197 

Credit funds. See Funds, 
credit. 

"Credit the drawer," 125 

Croker, Richard, 8 

Crossed check, 67 

— English form of, 69 

Cumulative stock, preferred, 
112 

Curb market, 393 

Customer's check, date of, 60 

— filling in the amount, 61 

— form and significance of, 59 

— how to make out a, 60 

"Days of Grace," 124 
Debenture bonds, 192, 193 



Decimal system, 25 

Definitions, bonds, 174 

—"capitalist," 13 

— capital stock, 102 

—"certified" check, 70 

— cheque-bank check, 69 

— crossed check, 67 

— "customer's check," 59 

— "expropriation" of funds, 93 

— "financier," 13 

—"funded debt," 13 

— funds, 12 

— "gain," 6 

—"hoard," 13 

— maintenance funds, 13 

— mortgages, 163 

—"order bill of lading," 343 

— "profits," 6 

— "safe deposit," 13 

— "security," 39 

— sinking fund, 13 

—"stock" and "shares," 102 

Demand, waiver of, 137, 138 

"Deposit ticket," 314 

Detached guarantee of note, 130 

Directors, Federal Reserve 

banks, 258 
Divisional bonds, 189 
Documented bill } invoice, 152, 

153 
Dollar, as the central fact in 

our system, 26 
Draft, advise of sale of, 156 
— commercial, 146 
— non-payment, 158 
— of consignor, 155 
— protest, 158 

— secured, used as funds, 157 
— security for acceptance and 

payment of, 151 
Due-bills, 146 



414 



INDEX 



Earnings, 304 
Emergency currency, 48 
— commercial, 51 
Equipment bond, 191 
Exchange, as chief method of 

acquiring property, 4 
— bank sells, 236 
— credit arises out of, 36 
— funds obtained by, 95-115 
— principles of, as applied to 

credit, 37 
Exchange-broker, 389 
Expenses, 304 
Express money order, 73 
Expropriation, definition of, 93 
— funds obtained by, 85-94 



Farm mortgages, 170 ■ 

— foreign institutions, 359 

— loan, 352 

application for, 352 

coupon bond of farm mort- 
gage bank, 355, 356 

mortgage deed, 353 

negotiating, 352 

standardized, 357 

statistics as to, 353 

value of, 354 

volume of, 353 

— service of institution for fur- 
nishing, 358 

Federal Land banks, 351, 359 

— object of the system, 361 

Federal Reserve agents' fund, 
269 

Federal Reserve Board, 259 

— powers of the, 260 

Federal Reserve system, ab- 
sence of rediscount system, 
255 

— Aldrich-Vreeland Act, 256 



Federal Reserve system — Cont. 

— bibliography, 273 

— capital of, 256 

— circulation of the currency 
of, 265 

— directors of the, 258 

— districts of the, 256 

— dual system of banks, 252 

— early banking regulation, 250 

— earnings of the, 259 

— elasticity of notes of, 263 

— expansion of note currency 
during certain seasons, 264 

— fund of the Federal Reserve 
agents, 269 

— government fiscal agent, 261 

— government institutions pro- 
viding credit during Great 
War, 271 

— inadequacy of reserves, 252 

— inelasticity of the National 
bank-notes, 254 

— intradistrict clearing, 269 

— intradistrict clearing through 
gold settlement fund, 267 

— mobilization and protection 
of reserves, 265 

— National banks, 250 

— National banks inadequate, 
251 

— note issues, 262 

—panic of 1907, 253 

— rediscount, 266 

— rediscounting agencies, 260 

— scope of the, 271 

— State banks in the, 270 

— summary of, 272 

— transfer of funds between 
bank of, 268 

Finances, advantage of a cor- 
poration in handling, 106 

— funds as a subject of, 10 



INDEX 



415 



Finances — Continued 
— place of credit in modern 
finance, 79 

— private, 11 

— public, 11 

— the lease, its relation to, 206 

Financial distress, 44 

Financial uses of credit, 44 

Fiscal agent, Federal Reserve 
banks as Government, 262 

Forced loans, 93 

Foreign bills, 148 

French Government and invest- 
ors, 299 

Funded debt, 13 

Funding operations, institu- 
tions and agents used in, 
211 

Funds, a limit to funding 
power, 95 

— bank furnishes current, in 
form of "bank credit," 233 

— bibliography, 11 

— by cooperation, 90 

— by inheritance, 88 

— capitalists, 96 

— credit, 33 

a corner on money, 44 

a purchase, 35 

arises out of exchange, 36 

as current funds, 34 

bank, 45 

bank accounts — deposits, 

48 

bank-notes, 46 

basis of judgment of, 38 

bibliography, 58, 81 

business integrity, 39 

commercial, 57-58 

current credits, 58 

"customer's check," 59 

definition of, 33 



Funds, Credit — Continued 

emergency currency, 48, 51 

essential characteristics of, 

36 

forms of, 45 

illustrations of uses of, 33 

instruments of transfer of, 

57-81 

letters of credit, 72 

: mutual credit, 58 

other instruments of trans- 
fer of, 70 

place of, in modern finance, 

79 

principles of exchange as 

applied to, 37 

public emergency currency, 

55 

relation of security to, 40 

result of a favorable judg- 
ment — confidence, 39 

security, 39 

"short sale." See Short 

sale. 

value and price of, 37 

received as a "short sale" 



of money, 40 

— credit instruments used as a 
means of obtaining, 118 

— definition of, 12 

— essential characteristics of 
money, 14 

—how obtained, 84-208 

— importance of, in business, 5 

— instruments for the collection 
of credit accounts, 142 

— maintenance, 13 

— money, 14-17 

must admit of being car- 
ried about, 17 

must be divisible into 

units, 15 



416 



INDEX 



Funds, money — Continued 

must be uniform in quality, 

16 

must have durability, 16 

— necessary part of business 
equipment, 10 

— necessity for current, in in- 
dustry, 231 

— obtained by exchange, 95-115 

a limit to funding power, 

95 

assessed and non-assessed 

stock, 114 

bibliography, 115 

capitalists, 96 

capital stock, 102 

common and preferred 

stock, 107-114 

importance of business 

training, 97 

sale of business interests, 

100 

sale of corporate shares, 

101 

sale of goods produced by 

labor, 98 

sale of one business inter- 
est to capitalize another, 99 

sale of partnership inter- 
est, 101 

sale of property not adapt- 
ed to capital employment, 
99 

sales of labor, 96 

sales of tangible property 

and business interests, 98 

saving, 97 

stock certificates, 104 

what may be offered for 

capital, 96 

— obtained by gift and "ex- 
propriation/' 85-94 



Funds — Continued 

bibliography, 94 

-definition of "expropria- 
tion," 93 

''gift" and contribution as 

a form of, 88 

"gift," the funding method 

of dependents, 87 

"inheritance," 88 

other non-industrial groups, 

86 

primitive economy, 85 

-the clan and the tribe, 86 



— obtained by sales of commer- 
cial credit, 116 

bibliography, 158 

extent of credit uses by the 

laboring man, 116 

the man of ability and in-^ 

tegrity, 117 
-the man with property, 118 



— obtained by sale of long-time 

paper, 159 

bibliography, 208 

— savings are capital, 312 

— secured drafts used as, 157 

— sinking, 13 

— subject of finance, 10 

— things that have been used 

as, 17-19 
— two forms of, 14 
Future delivery, obtaining 

money for, 38 

"Gain," definition of, 6 
General mortgage bonds, 187, 

188 
Gift, and contribution usually 
take the form of funds, 88 
— funds obtained by, 85-94 
— the funding method of de- 
pendents, 87 



INDEX 



417 



Gold, 22 

— importance of standard for, 

223 
Gold bonds, 197 
Gold coins of the United States, 

27 
Grace, notes with waiver of, 

123 
Guarantee of note, endorsed, 

130 

"Hoard," money not for use, 13 
"Honesty is the best policy," 8 

Illiterate, the signature of a, 

124 
Illustrations of credit uses, 33- 

36 
Income bonds, 194, 196 
Income, rate of, 317 
Indemnity bond and mortgage, 

166, 167 
"Indication list," 74 
Individual risk, in insurance, 

370 
Indorsement, 128 
Inheritance, funds obtained by, 

88 
— laws of, 91 

Insurance. See Insurance com- 
pany. 
Insurance companies, annual 

income of life insurance 

companies in the United 

States, 378 
— as factors in the security 

market, 380 
— assessment insurance, 373 
— cash items of, 379 
— classification of investments 

of, 379 
— credit insurance, 365 



Insurance companies — Cont. 

— different forms of risk, 368 

— expansion of new fields by, 
383 

— Hughes investigation of, re- 
sults, 382 

— individual risk and specula- 
tion, 370 

— life insurance, 372-379 

—Lloyds, 369 

— meaning of insurance, 365 

— prevention of misuse of 
funds, 383 

— reserve companies, 374 

expose of working of, 375 

— safety of insurance, 371 

— social responsibility of, 382 

— State insurance, 384 

— the security, 367 

—title, 367 

Insurance policy on shipment — 
documented bill, 154 

Integrity, business, 39 

Interchangeable bank money- 
order, 78 

Interest, advance of, 331 

Interest note, 122 

"Interest notes," issued during 
Civil War, 56 

Interstate Commerce Commis- 
sion, 288 

Investment, difference between 
speculation and, 401 

— of savings-banks, 310 

Investment banker, bibliog- 
raphy, 300 

— bonds and the small investor, 
300 

— buying in large lots, 295 

—difficult role of the, 285 

— education of a, 299 



418 



INDEX 



Investment banker — Continued 

— financial department of, 295 

— helping the investor, 289 

— investigation of new issues, 
288 

— investor classes, 296 

— keeps investments well di- 
versified, 289 

— link between business enter- 
prise and public, 287 

— need of capital in modern en- 
terprises, 285 

— risk involved in new under- 
takings, 286 

— securities, staple and special- 
ties, 294 

— selling department of, 296 

— selling methods, 297 

— the investment demand, 299 

Invoice, documented bill, 152, 
153 

"Iron clad" collateral note, 131 

Jackson, President, check 

drawn by, 61 
Joint and several note, 121 
Joint note, 119 
Joint-stock savings bank, 318 
Judgment note, 133 

Knauth, Nachod & Kiihne, 
traveler's check, 78 

Labor, sale of goods produced 

by, 98 
— sales of, 96 
Landschaften of Prussia, the, 

363 
Law, business, 7 
— necessity for, law and order 

in business, 6 
— of inheritance, 91 



Lease, as security, 206 

— dangers of purchases of, 207 

— its relation to finance, 206 

— uses of, by credit stores, 207 

Legal tender, 136 

Legal-tender bonds, 197 

Letter of Credit, 72 

— advice, 74 

— indorsement, 75 

Lien security, on a note, 128 

Life insurance, annual income 
of companies, 378 

— application of the two prin- 
ciples of, 377 

— assessment, 373 

— "natural" and "level" pre- 
miums, 373 

— principle of, 372 

— reserve companies, 374 

Lloyds, insurance, company, 
369 

Loans, at a fixed rate by lot, 
331 

— awarded to bidder of highest 
premium on dues, 331 

—cattle, 349 

— negotiating a farm-mortgage, 
352 

— plans for making, 330 

— warehouse receipts as basis 
- of, 344 

London draft on Bank of the 
United States, 149 

London Stock Exchange, 391 

Long-time credits. See Long- 
time paper. 

Long-time paper, 159 

— classes of, 163 

— form of, 159 

— illustration of difference in 
forms and uses of short 
and, 160 



INDEX 



419 



Loyal Mystic Legion of Amer- 
ica, 373 

Maintenance funds, 13 
"Maker," of a note, 118 
Maturing value of shares, 337 
Mines, mortgages on, 172 
Mint, a money factory, 224 
—work of, 226 
Money, ability to obtain for 

future delivery, 38 
— a corner on, 44 
— bank credit, 221 
— "bank credit" exchanged for, 

233 
— banks buy and sell foreign, 

237 
— base metals, 19 
— bibliography, 31 
— conditions on which f undabil- 
ity and value of, depend, 
15 
— decimal system, 25 
— development of a standard, 

23 
— "dollar," the central fact in 

our system, 26 
— essential characteristics of, 

14 
— -express, 73 
— gold and silver, 22 
— gold coins, 27 
— in circulation, 222 
— maintenance of integrity of 

our, 224 
— minor coins, 28 
— need for coined, 213 
— ornaments as, 21 
— paper, 28 

currency certificates, 29 

Federal Reserve bank- 
notes, 30 



Money, paper — Continued 

Federal Reserve notes, 30 

fractional currency notes, 

30 

gold certificates, 28 

National bank-notes, 30 

old demand notes, com- 
pound interest notes, 30 

silver certificates, 29 

treasury notes of 1890, 29 

United States notes or 

greenbacks, 28 
— silver coins, 27 
— the mint a factory, 224 
— things that have been used as, 

17-19 
— uniformity of value in our 

system, 31 
advantages and disadvan- 
tages in the use of, 19 

agricultural products, 18 

dried fish, 18 

live stock, 18 

: skins, 17 

Money funds. See Funds, 

money. 
Money-order, interchangeable 

bank, 78 
— form of, used as traveler's 

check, 79 
Morris Plan banks, 339 
— creation and object of, 339 
— parent company of, 340 
— total capitalization of, 341 
Morris Plan Insurance Society, 

340 
Mortgages, 163 
— accommodation, 167 
—chattel, 169 
— collateral certificate, 174 
— consolidated, 189 
— contracts of, a sale, 165 



420 



INDEX 



Mortgages — Continued 

— definition, 163 

—farm, 170 

— form of serial bond issued 
against, 181 

— on "business property," 170 

— on mines, 172 

— on timber lands, 172 

— parti-mortgage receipt, 171- 
173 

— real-estate, nature of a, 354 

— short form of mortgage se- 
curing note, 164 

— what are, 163 

— without separate note, 165 

Mortgage note, 162 

"Mutual" savings banks, 312 



National banks, 250 
National Farm Loan Associa- 
tions, 359 
Negotiable note, 120 
New York, State Land Bank 

of, 363 
New York Stock Exchange, 392 
Non-assessed stock, 114 
Non-cumulative preferred 

stock, 112 
— certificate of, 107 
Non-negotiable note, 119 
Non-payment of note, 136 
Notarial notice of non-payment, 

139 
Notes, accommodation credit- 

the-drawer note, 128 
— collateral, 131 
— collateral judgment, 134 
— collateral, with memorandum 

on back, 132 
— commercial broker's, 387 
—"credit the drawer," 126 



Notes — Continued 

— distinguished from bonds, 

182 
— drawn to "myself," requiring 

indorsement, 125 
— Exchange Bank of St. Louis, 

47 
— Federal Reserve, 262 
— fifty-cent bank-note, 53 
—First Bank of United States, 

45 
— guarantee of, 130 
— "iron clad" collateral note, 

131 
— joint, 119 

— joint and several, 121 
— judgment, 133 
— mortgage, 162 
— mortgage without separate, 

165 
— negotiable, 120 
— negotiable by delivery, 121 
— non-negotiable, 119 
— non-payment of, 136 
— paper money. See Money, 

paper. 
— "pay to the order of," 129 
— promissory, 118 
— protested, 139 
— Second Bank of United 

States, 46 
— Southern Bank of Kentucky, 

46 
— Tioga County Bank, 47 
— without payee, 119 
— with power»given attorney to 

confess judgment, 134 
— with waver of grace, 123 
Notice of non-payment, 137 
Notice, waiver of, 137, 138 
"Nullifiers," the, 218 






INDEX 



421 



"Order bill of lading," 343 . 
Ornaments, as money, 21 
Oxford Provident Building As- 
sociation, 327 

Panic of 1907, 253 
Paper money, 28 
— redemption of, 216 
Parti-mortgage receipt, 172 
Partnership, difference between 

a corporation and, 104 
Partnership interest, sale of, 

101 
Part payment, of promissory 

note, 135 
"Pass-book," 314 
"Passed" dividends, 114 
"Pay to the order of" note, 129 
Payee, entering name of, on 

check, 62 
— note without, 119 
— of a note, 119 
Payment, contract extending 

* time of, 202 
Personal security on a note, 

128 
— indorsement, 128 
Philadelphia form of indemnity 

bond and mortgage, 166 
— individual private bond, 168 
Postal Savings system, 322 
Power of attorney, 68 
— judgment note with, 133 
Preferred stock, 109 
— cumulative and non-cumula- 
tive, 112 
— first preferred and second 

preferred, 112 

certificate of, 113 

—kinds of, 112 
Premiums, 373 
Primitive economy, 85 



Produce broker, 390 

"Profits," definition of, 6 

— increased, the result of in- 
creased capital, 303 

Promissory note, 118 

— advantages and disadvan- 
tages of using, 140 

— a "marks" signature, 124 

— as to date of making a, 
123 

— as to parties, 118 

— as to signature, 124 

— as to words of promise, 121 

— "credit the drawer," 125 

— form of, 118 

— indorsement "without re- 
course," 129, 130 

— legal tender, 136 

— non-essential clauses, 125 

— non-payment of, 136 

— notarial notice of non-pay- 
ment, 139 

— notice of non-payment, 137 

— notice of protest, 140 

— part payment, 135 

— parts of note containing con- 
tracts of security, 126 

— presentation for payment, 
135 

— protest, 138 

— "value received," 125 

— waiver of demand and notice, 
137, 138 

— "without defalcation," 125 

— words of transferability, 120 

Property, development of the 
idea of, 3 

— how acquired, 3 

by exchange, 3 

by gift, 4 

— mortgages, 163-174 

— mortgages on "business," 170 



422 



INDEX 



Property — Continued 

— sales of, not adapted to capi- 
tal employment, 99 

— sales of tangible, and busi- 
ness interests, 98 

Protest, 138 

— notarial certificate of, 140 

— notice of, 141 

"Provident Institution for Sav- 
ings in the Town of Bos- 
ton," 309 

— bond investments of, 318 

Public emergency currency, 55 

Real-estate bonds, 187 

—individual, 183 

Real-estate mortgage, nature 
of, 354 

Receipt, for money deposited 
on bond purchase, 178 

—parti -mortgage, 172 

— statement with, 145 

— used as checks, 66 

— warehouse, as basis of loan, 
344 

Receivers' certificates. See Cer- 
tificates. 

"Receiving teller," 314 

Redeemable bonds, 197 

Redemption of inferior coins, 
215 

Rediscount system, absence of, 
255 

Registered bonds, 197 

Release, letter of, 387 

Reserves, mobilization and pro- 
tection of, 265 

Revenue department, 226 

"Run," a, 322 

Rural credit, farm-mortgage 
bank, 351 

— nature of, 350 



Rural credit unions, 361 
— operations of, 362 
— types of, 361 

"Safe deposit," money not for 
use, 13 

Sale, advice of sale of draft, 
156 

— at auction, advance of inter- 
est, 331 

— of assets of government, 228 

Sales of labor, 96 

Saving, 97 

Savings-banks, bibliography, 
324 

— comparison of methods, 321 

— conditions giving rise to, 307 

— how to deal with, 313 

— illustration of the service of, 
311 

—"mutual," 312 

— mutual and joint-stock, 318 

— rate of income, 317 

— relation to the money system, 
321 

— relation to other financial in- 
stitutions, 321 

— rules governing investments 
of, 315 

— safety of investment, 317 

— saving as a means of obtain- 
ing capital, 303 

— savings are capital funds, 
312 

— service of the, 306 

— statements of the bank, 315 

—the first, 308 

— the investments of, 310 

— the safe investment of sav- 
ings, 309 

Scrip, issued by Canal Com- 
pany, 52 



INDEX 



423 



Scrip — Continued 

— issued to meet current ex- 
penses, 55 

— issued to pay paper divi- 
dends, 54 

— loan scrip used to meet pay- 
rolls, 52 

— railroad trading, 51 

— shilling, to meet scarcity of 
coin, 53 

— Sutler scrip issued during 
Civil War, 51 

— Town Loan certificate, 56 

— Turnpike Company, 50 

Securities, staples and special- 
ties, 294 

Security, 39 

— for acceptance and payment 
of drafts, 151 

— relation of credit to, 40 

Serial bond, 181 

Set-off, a, 146 

Several, joint and, note, 121 

Shares, sale of corporate, 101 

" Short Sale," credit received as, 
of money, 40 . 

—of flour, 40 

— of money, 42 

rules of settlement same as 

in case of wheat, 43 

— of wheat, 41 

— settlement of the, of wheat, 
41 

Short-time paper, difference be- 
tween long and, 160 

Sight-bills, and drafts, 150 

Sight-draft, 150 

Signature, for promissory note, 
124 

Silver, 22 

Silver coins of the United 
States, 27 . 



Sinking fund, 13 

South Sea Bubble, 392 

Speculation, difference between 
investment and, 401 

Stamp Tax, evading the, 66 

Standard, development of a 
money, 23 

— maintenance of a, 215 

Standard Oil Company, certif- 
icate of stock, 111 

State banks in the Federal Re- 
serve system, 270 

State insurance, 384 

State Land Bank of New York, 
362 

State Land Banks, 351 

Statement with receipt, 145 

Stock, certificate showing part 
payment in subscription 
to, 179 

■ — common, 107 

certificate of, 105, 108 

— non- cumulative preferred, 
certificate of, 107 

— other forms of, 114 

— preferred, 109. See also Pre- 
ferred stock 

certificate of, 109 

— share of, in Bank of the 
United States, 103 

— trust certificate, 114 

Stock broker, 389 

Stock certificates, 104 

Stock Exchange, bucket-shop 
operations, 404 

— consolidated Stock and Pe- 
troleum Exchange, 393 

— Curb market, 393 

— history of, 391 

— interior of, 395 

— layout of floor of, 396 

— London, 391 



424 



INDEX 



Stock Exchange — Continued 

—New York, 392 

— organization of a, 394 

— organization of Philadelphia 

Exchange, 394 
—Philadelphia, 391 
Success, elements of, in busi- 
ness, 8 

Taxation, 93, 228 

Timber land, mortgages on, 172 

Time draft, 147, 150 

Title insurance, 367 

"Tontine Coffee-House," 392 

Transferability of note, words 

of, 120 
Traveler's check, 75, 76 
— form of money order used as, 

79 
— of Brown Brothers 7 , 76 
— of Knauth, Nachod & Kiihne, 

78 
Trust certificate, 114 
Trust company, as agent of sale 

and transfer, 177 
— as executor of estates, 278 
— as investment agent, 282 
— bibliography, 284 
— capital requirements of, 280 
— commercial banking activities 

of a, 276 
— development of business of, 

279 
— economies of the, 278 
— functions of, 280 
— origin of, 276 
— powers of, 281 
— real estate operations, 283 
— service of the, 277 
—State banks, 275 
Trustee, bank as, 235 
Trusteeship, principle of, 89 



Trustees, of bond security, 185 
— who may be, of a bond issue, 
185 

Unions, rural credit, 361 

United States, money system 
of, 26-31 

U. S. Treasury, actual payment 
of gold not usually de- 
manded, 222 

— bank credit money, 221 

— bibliography, 230 

— coinage, 214 

— gold and other money assets 
of the, 227 

— Government borrowing, 229 

— history of the Independent 
Treasury, 217 

— importance of gold standard, 
223 

— maintenance of a standard, 
215 

— maintenance of integrity of 
our money, 224 

— money in circulation, 222 

— need for coined money, 213 

— our money system a refined 
system of credit, 219 

— providing for a complex sys- 
tem of money, 214 

— redemption of inferior coins, 
215 

— redemption of paper money, 
216 

— relation of the revenue de- 
partment, 226 

— relations of Government to 
modern systems of finance, 
213 

— sale of assets of Government, 
228 

— taxation, 228 



INDEX 



425 



U. S. Treasury — Continued 
— the mint a money factory, 

224 
— what it consists of, 216 
Unsecured bonds, 178, 180 

"Value receivable," 125 

Waiver of demand and notice, 

137, 138 
Waiver of grace, note with, 123 



Warehouse receipts, as basis of 

a loan, 345 
War Risk insurance, 384 
Webster, Daniel, check drawn 

by, 62 
— power of attorney drawn by, 

68 
Withdrawal valuation, 334 
"Without defalcation," 125 
"Without recourse," indorse- 
ment, 129, 130 



(23) 



